JCY International Berhad (KLSE:JCY) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, JCY International Berhad (KLSE:JCY) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

Check out 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 RM53.6m at the end of March 2023, a reduction from RM93.3m over a year. But on the other hand it also has RM140.7m in cash, leading to a RM87.1m net cash position.

A Look At JCY International Berhad's Liabilities

According to the last reported balance sheet, JCY International Berhad had liabilities of RM115.6m due within 12 months, and liabilities of RM1.75m due beyond 12 months. Offsetting these obligations, it had cash of RM140.7m as well as receivables valued at RM101.9m due within 12 months. So it can boast RM125.2m more liquid assets than total liabilities.

This surplus strongly suggests that JCY International Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JCY International 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 JCY International Berhad had a loss before interest and tax, and actually shrunk its revenue by 50%, to RM525m. To be frank that doesn't bode well.

So How Risky Is JCY International Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that JCY International Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM111m and booked a RM139m accounting loss. Given it only has net cash of RM87.1m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for JCY International Berhad that you should be aware of before investing here.

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.