Health Check: How Prudently Does Joe Holding Berhad (KLSE:JOE) Use Debt?

Warren Buffett famously said, '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 can see that Joe Holding Berhad (KLSE:JOE) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Joe Holding Berhad

What Is Joe Holding Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Joe Holding Berhad had RM13.1m of debt, an increase on RM1.00m, over one year. But it also has RM87.5m in cash to offset that, meaning it has RM74.5m net cash.

How Healthy Is Joe Holding Berhad's Balance Sheet?

According to the last reported balance sheet, Joe Holding Berhad had liabilities of RM22.2m due within 12 months, and liabilities of RM49.6m due beyond 12 months. Offsetting this, it had RM87.5m in cash and RM58.6m in receivables that were due within 12 months. So it can boast RM74.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Joe Holding Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Joe Holding Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Joe Holding 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.

In the last year Joe Holding Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to RM21m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Joe Holding Berhad?

Although Joe Holding Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM11m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Joe Holding Berhad is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.