Is JCY International Berhad (KLSE:JCY) A Risky Investment?

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. As with many other companies JCY International Berhad (KLSE:JCY) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for JCY International Berhad

What Is JCY International Berhad's Net Debt?

As you can see below, JCY International Berhad had RM70.2m of debt at September 2022, down from RM96.0m a year prior. But it also has RM164.6m in cash to offset that, meaning it has RM94.4m net cash.

A Look At JCY International Berhad's Liabilities

We can see from the most recent balance sheet that JCY International Berhad had liabilities of RM160.8m falling due within a year, and liabilities of RM6.22m due beyond that. On the other hand, it had cash of RM164.6m and RM110.3m worth of receivables due within a year. So it can boast RM107.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that JCY International 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. Simply put, the fact that JCY International Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is JCY International Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year JCY International Berhad had a loss before interest and tax, and actually shrunk its revenue by 21%, to RM836m. That makes us nervous, to say the least.

So How Risky Is JCY International Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year JCY International Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM126m and booked a RM91m accounting loss. With only RM94.4m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. We've identified 3 warning signs with JCY International Berhad (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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. 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.