These 4 Measures Indicate That Jaycorp Berhad (KLSE:JAYCORP) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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.

View our latest analysis for Jaycorp Berhad

What Is Jaycorp Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at January 2021 Jaycorp Berhad had debt of RM23.5m, up from RM16.8m in one year. But on the other hand it also has RM49.1m in cash, leading to a RM25.5m net cash position.

How Healthy Is Jaycorp Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jaycorp Berhad had liabilities of RM68.3m due within 12 months and liabilities of RM17.6m due beyond that. On the other hand, it had cash of RM49.1m and RM69.1m worth of receivables due within a year. So it can boast RM32.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Jaycorp Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jaycorp Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jaycorp Berhad grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. 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 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. 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 64% 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 it is always sensible to investigate a company's debt, in this case Jaycorp Berhad has RM25.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 47% over the last year. So is Jaycorp Berhad's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Jaycorp Berhad has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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