Would Jentayu Sustainables Berhad (KLSE:JSB) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Jentayu Sustainables Berhad (KLSE:JSB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jentayu Sustainables Berhad

How Much Debt Does Jentayu Sustainables Berhad Carry?

The image below, which you can click on for greater detail, shows that Jentayu Sustainables Berhad had debt of RM20.8m at the end of March 2024, a reduction from RM25.4m over a year. However, because it has a cash reserve of RM6.66m, its net debt is less, at about RM14.1m.

A Look At Jentayu Sustainables Berhad's Liabilities

We can see from the most recent balance sheet that Jentayu Sustainables Berhad had liabilities of RM32.8m falling due within a year, and liabilities of RM30.2m due beyond that. On the other hand, it had cash of RM6.66m and RM36.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM20.0m.

Since publicly traded Jentayu Sustainables Berhad shares are worth a total of RM261.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jentayu Sustainables Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Jentayu Sustainables Berhad had a loss before interest and tax, and actually shrunk its revenue by 28%, to RM33m. To be frank that doesn't bode well.

Caveat Emptor

While Jentayu Sustainables 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. To be specific the EBIT loss came in at RM22m. 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. However, it doesn't help that it burned through RM68m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jentayu Sustainables Berhad is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

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