Is Jerasia Capital Berhad (KLSE:JERASIA) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jerasia Capital Berhad (KLSE:JERASIA) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jerasia Capital Berhad

What Is Jerasia Capital Berhad's Net Debt?

As you can see below, Jerasia Capital Berhad had RM127.4m of debt at March 2020, down from RM142.8m a year prior. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Jerasia Capital Berhad's Balance Sheet?

According to the last reported balance sheet, Jerasia Capital Berhad had liabilities of RM169.3m due within 12 months, and liabilities of RM395.0k due beyond 12 months. On the other hand, it had cash of RM1.78m and RM110.1m worth of receivables due within a year. So it has liabilities totalling RM57.8m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM27.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Jerasia Capital Berhad would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jerasia Capital 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.

Over 12 months, Jerasia Capital Berhad made a loss at the EBIT level, and saw its revenue drop to RM481m, which is a fall of 4.5%. We would much prefer see growth.

Caveat Emptor

Importantly, Jerasia Capital Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM2.5m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of RM9.7m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Jerasia Capital Berhad has 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

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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