Is Jadi Imaging Holdings Berhad (KLSE:JADI) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jadi Imaging Holdings Berhad

What Is Jadi Imaging Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Jadi Imaging Holdings Berhad had debt of RM16.8m at the end of March 2022, a reduction from RM21.8m over a year. However, it also had RM13.9m in cash, and so its net debt is RM2.96m.

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

We can see from the most recent balance sheet that Jadi Imaging Holdings Berhad had liabilities of RM10.0m falling due within a year, and liabilities of RM22.1m due beyond that. On the other hand, it had cash of RM13.9m and RM14.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM3.66m.

Given Jadi Imaging Holdings Berhad has a market capitalization of RM86.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 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 4.5%, to RM43m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Jadi Imaging Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM8.6m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM7.9m into a profit. So we do think this stock is quite risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jadi Imaging Holdings Berhad you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.