Is Jadi Imaging Holdings Berhad (KLSE:JADI) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jadi Imaging Holdings Berhad (KLSE:JADI) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jadi Imaging Holdings Berhad

How Much Debt Does Jadi Imaging Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Jadi Imaging Holdings Berhad had RM21.8m of debt, an increase on RM11.5m, over one year. On the flip side, it has RM17.5m in cash leading to net debt of about RM4.33m.

A Look At Jadi Imaging Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Jadi Imaging Holdings Berhad had liabilities of RM13.2m due within 12 months and liabilities of RM27.1m due beyond that. Offsetting this, it had RM17.5m in cash and RM13.3m in receivables that were due within 12 months. So its liabilities total RM9.47m more than the combination of its cash and short-term receivables.

Of course, Jadi Imaging Holdings Berhad has a market capitalization of RM99.9m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Jadi Imaging Holdings 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 Jadi Imaging Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 4.6%, to RM45m. We would much prefer see growth.

Caveat Emptor

Importantly, Jadi Imaging Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM1.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM9.7m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jadi Imaging Holdings Berhad (of which 1 is a bit concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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