Jadi Imaging Holdings Berhad (KLSE:JADI) Has Debt But No Earnings; Should You Worry?

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. Importantly, Jadi Imaging Holdings Berhad (KLSE:JADI) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

View 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 at September 2020 Jadi Imaging Holdings Berhad had debt of RM18.5m, up from none in one year. However, its balance sheet shows it holds RM19.4m in cash, so it actually has RM893.0k net cash.

How Healthy 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 RM12.5m due within 12 months and liabilities of RM21.3m due beyond that. On the other hand, it had cash of RM19.4m and RM27.8m worth of receivables due within a year. So it actually has RM13.4m more liquid assets than total liabilities.

This surplus suggests that Jadi Imaging Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jadi Imaging Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jadi Imaging Holdings 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.

In the last year Jadi Imaging Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 30%, to RM40m. That makes us nervous, to say the least.

So How Risky Is Jadi Imaging Holdings Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Jadi Imaging Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM5.2m of cash and made a loss of RM29m. With only RM893.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Jadi Imaging Holdings Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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. 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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