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. As with many other companies Jadi Imaging Holdings Berhad (KLSE:JADI) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jadi Imaging Holdings Berhad

How Much Debt Does Jadi Imaging Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that Jadi Imaging Holdings Berhad had debt of RM11.7m at the end of December 2022, a reduction from RM18.6m over a year. But it also has RM11.9m in cash to offset that, meaning it has RM265.0k net cash.

How Strong Is Jadi Imaging Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jadi Imaging Holdings Berhad had liabilities of RM6.69m due within 12 months and liabilities of RM17.1m due beyond that. On the other hand, it had cash of RM11.9m and RM9.28m worth of receivables due within a year. So it has liabilities totalling RM2.56m more than its cash and near-term receivables, combined.

Since publicly traded Jadi Imaging Holdings Berhad shares are worth a total of RM70.0m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jadi Imaging Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jadi Imaging Holdings 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.

Over 12 months, Jadi Imaging Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM37m, which is a fall of 18%. That's not what we would hope to see.

So How Risky Is Jadi Imaging Holdings Berhad?

Although Jadi Imaging Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM4.9m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Jadi Imaging Holdings Berhad has 2 warning signs (and 1 which is concerning) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.