Is JAG Berhad (KLSE:JAG) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, JAG Berhad (KLSE:JAG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for JAG Berhad

What Is JAG Berhad's Debt?

As you can see below, JAG Berhad had RM16.4m of debt at June 2021, down from RM21.6m a year prior. But on the other hand it also has RM19.4m in cash, leading to a RM2.97m net cash position.

How Strong Is JAG Berhad's Balance Sheet?

According to the last reported balance sheet, JAG Berhad had liabilities of RM24.6m due within 12 months, and liabilities of RM26.7m due beyond 12 months. On the other hand, it had cash of RM19.4m and RM17.2m worth of receivables due within a year. So its liabilities total RM14.7m more than the combination of its cash and short-term receivables.

Since publicly traded JAG Berhad shares are worth a total of RM210.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, JAG Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that JAG Berhad grew its EBIT by 159% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is JAG Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. JAG Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last two years, JAG Berhad actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

We could understand if investors are concerned about JAG Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM2.97m. And we liked the look of last year's 159% year-on-year EBIT growth. So we are not troubled with JAG Berhad's debt use. 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. We've identified 2 warning signs with JAG Berhad , and understanding them should be part of your investment process.

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.
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