Is Jati Tinggi Group Berhad (KLSE:JTGROUP) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Jati Tinggi Group Berhad (KLSE:JTGROUP) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jati Tinggi Group Berhad

What Is Jati Tinggi Group Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jati Tinggi Group Berhad had RM14.8m of debt in May 2024, down from RM27.0m, one year before. But it also has RM32.4m in cash to offset that, meaning it has RM17.6m net cash.

How Strong Is Jati Tinggi Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Jati Tinggi Group Berhad had liabilities of RM55.6m falling due within a year, and liabilities of RM902.0k due beyond that. Offsetting this, it had RM32.4m in cash and RM84.6m in receivables that were due within 12 months. So it can boast RM60.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Jati Tinggi Group Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Jati Tinggi Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Jati Tinggi Group Berhad has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jati Tinggi Group Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jati Tinggi Group Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Jati Tinggi Group Berhad created free cash flow amounting to 2.0% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jati Tinggi Group Berhad has RM17.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 40% over the last year. So we don't think Jati Tinggi Group Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Jati Tinggi Group Berhad , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.