Is Jaya Tiasa Holdings Berhad (KLSE:JTIASA) A Risky Investment?

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 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, Jaya Tiasa Holdings Berhad (KLSE:JTIASA) does carry debt. But should shareholders be worried about its use of debt?

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. 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. 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.

Check out our latest analysis for Jaya Tiasa Holdings Berhad

What Is Jaya Tiasa Holdings Berhad's Debt?

As you can see below, Jaya Tiasa Holdings Berhad had RM237.6m of debt at March 2024, down from RM357.3m a year prior. However, it does have RM270.4m in cash offsetting this, leading to net cash of RM32.8m.

How Strong Is Jaya Tiasa Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Jaya Tiasa Holdings Berhad had liabilities of RM144.3m due within 12 months, and liabilities of RM355.5m due beyond 12 months. Offsetting this, it had RM270.4m in cash and RM54.9m in receivables that were due within 12 months. So it has liabilities totalling RM174.5m more than its cash and near-term receivables, combined.

Given Jaya Tiasa Holdings Berhad has a market capitalization of RM963.2m, it's hard to believe these liabilities pose much 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, Jaya Tiasa Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Jaya Tiasa Holdings Berhad has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jaya Tiasa Holdings Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jaya Tiasa Holdings 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. Happily for any shareholders, Jaya Tiasa Holdings Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Jaya Tiasa Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM32.8m. And it impressed us with free cash flow of RM314m, being 123% of its EBIT. So we don't think Jaya Tiasa Holdings Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Jaya Tiasa Holdings Berhad (including 1 which is significant) .

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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