Is Jerasia Capital Berhad (KLSE:JERASIA) Using Debt Sensibly?

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.' 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. We note that Jerasia Capital Berhad (KLSE:JERASIA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jerasia Capital Berhad

How Much Debt Does Jerasia Capital Berhad Carry?

The image below, which you can click on for greater detail, shows that at November 2020 Jerasia Capital Berhad had debt of RM192.4m, up from RM132.2m in one year. However, it also had RM6.24m in cash, and so its net debt is RM186.2m.

How Healthy Is Jerasia Capital Berhad's Balance Sheet?

According to the last reported balance sheet, Jerasia Capital Berhad had liabilities of RM255.9m due within 12 months, and liabilities of RM10.2m due beyond 12 months. On the other hand, it had cash of RM6.24m and RM126.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM133.4m.

This deficit casts a shadow over the RM23.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Jerasia Capital Berhad would probably need a major re-capitalization if its creditors were to demand repayment. 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 Jerasia Capital 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.

Over 12 months, Jerasia Capital Berhad made a loss at the EBIT level, and saw its revenue drop to RM310m, which is a fall of 40%. That makes us nervous, to say the least.

Caveat Emptor

While Jerasia Capital Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM76m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through RM10m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. To that end, you should be aware of the 3 warning signs we've spotted with Jerasia Capital Berhad .

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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