Is Jadi Imaging Holdings Berhad (KLSE:JADI) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Jadi Imaging Holdings Berhad (KLSE:JADI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that JADI is potentially overvalued!

What Is Jadi Imaging Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Jadi Imaging Holdings Berhad had debt of RM15.1m at the end of June 2022, a reduction from RM21.6m over a year. But on the other hand it also has RM15.6m in cash, leading to a RM493.0k net cash position.

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

According to the last reported balance sheet, Jadi Imaging Holdings Berhad had liabilities of RM8.62m due within 12 months, and liabilities of RM20.7m due beyond 12 months. On the other hand, it had cash of RM15.6m and RM10.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM3.35m.

Since publicly traded Jadi Imaging Holdings Berhad shares are worth a total of RM80.7m, 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. 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.

Over 12 months, Jadi Imaging Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM40m, which is a fall of 7.5%. We would much prefer see growth.

So How Risky Is Jadi Imaging Holdings Berhad?

While Jadi Imaging Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM5.7m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jadi Imaging Holdings Berhad is showing 3 warning signs in our investment analysis , you should know about...

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.