Is JCY International Berhad (KLSE:JCY) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that JCY International Berhad (KLSE:JCY) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for JCY International Berhad

What Is JCY International Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that JCY International Berhad had debt of RM54.5m at the end of June 2023, a reduction from RM91.8m over a year. But it also has RM144.9m in cash to offset that, meaning it has RM90.3m 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 RM124.1m falling due within a year, and liabilities of RM1.58m due beyond that. Offsetting these obligations, it had cash of RM144.9m as well as receivables valued at RM132.8m due within 12 months. So it can boast RM152.0m more liquid assets than total liabilities.

This surplus liquidity suggests that JCY International Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. 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 you can't view debt in total isolation; since JCY International 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, JCY International Berhad made a loss at the EBIT level, and saw its revenue drop to RM486m, which is a fall of 49%. 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 the fact is that over the last twelve months JCY International Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM16m and booked a RM128m accounting loss. With only RM90.3m 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that JCY International Berhad is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.