Joe Holding Berhad (KLSE:JOE) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Joe Holding Berhad (KLSE:JOE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Joe Holding Berhad

How Much Debt Does Joe Holding Berhad Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Joe Holding Berhad had debt of RM64.7m, up from RM11.7m in one year. However, its balance sheet shows it holds RM106.3m in cash, so it actually has RM41.7m net cash.

How Strong Is Joe Holding Berhad's Balance Sheet?

The latest balance sheet data shows that Joe Holding Berhad had liabilities of RM69.8m due within a year, and liabilities of RM8.52m falling due after that. On the other hand, it had cash of RM106.3m and RM27.9m worth of receivables due within a year. So it actually has RM55.8m more liquid assets than total liabilities.

This luscious liquidity implies that Joe Holding Berhad's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Joe Holding Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 13%, to RM23m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Joe Holding Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Joe Holding Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM33m and booked a RM2.8m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of RM41.7m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 concerning...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.