Jaycorp Berhad (KLSE:JAYCORP) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Jaycorp Berhad (KLSE:JAYCORP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jaycorp Berhad

What Is Jaycorp Berhad's Debt?

The image below, which you can click on for greater detail, shows that at October 2020 Jaycorp Berhad had debt of RM19.9m, up from RM12.4m in one year. However, it does have RM59.4m in cash offsetting this, leading to net cash of RM39.5m.

How Strong Is Jaycorp Berhad's Balance Sheet?

The latest balance sheet data shows that Jaycorp Berhad had liabilities of RM67.7m due within a year, and liabilities of RM16.3m falling due after that. Offsetting this, it had RM59.4m in cash and RM61.6m in receivables that were due within 12 months. So it actually has RM37.0m more liquid assets than total liabilities.

This excess liquidity suggests that Jaycorp Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Jaycorp Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Jaycorp Berhad grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 Jaycorp 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jaycorp Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Jaycorp Berhad produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Jaycorp Berhad has net cash of RM39.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM34m, being 79% of its EBIT. So is Jaycorp Berhad's debt a risk? It doesn't seem so to us. 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. Be aware that Jaycorp Berhad is showing 2 warning signs in our investment analysis , 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. 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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