JAKS Resources Berhad (KLSE:JAKS) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, JAKS Resources Berhad (KLSE:JAKS) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for JAKS Resources Berhad

What Is JAKS Resources Berhad's Debt?

The image below, which you can click on for greater detail, shows that JAKS Resources Berhad had debt of RM473.4m at the end of June 2024, a reduction from RM506.6m over a year. However, because it has a cash reserve of RM56.1m, its net debt is less, at about RM417.3m.

A Look At JAKS Resources Berhad's Liabilities

According to the last reported balance sheet, JAKS Resources Berhad had liabilities of RM523.6m due within 12 months, and liabilities of RM407.7m due beyond 12 months. Offsetting these obligations, it had cash of RM56.1m as well as receivables valued at RM523.7m due within 12 months. So its liabilities total RM351.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM365.0m, so it does suggest shareholders should keep an eye on JAKS Resources Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JAKS Resources Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year JAKS Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 42%, to RM49m. To be frank that doesn't bode well.

Caveat Emptor

While JAKS Resources Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM44m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM33m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for JAKS Resources Berhad (1 can't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.