Health Check: How Prudently Does JHM Consolidation Berhad (KLSE:JHM) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, JHM Consolidation Berhad (KLSE:JHM) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for JHM Consolidation Berhad

What Is JHM Consolidation Berhad's Debt?

The image below, which you can click on for greater detail, shows that JHM Consolidation Berhad had debt of RM31.8m at the end of June 2024, a reduction from RM51.3m over a year. But it also has RM92.9m in cash to offset that, meaning it has RM61.1m net cash.

How Healthy Is JHM Consolidation Berhad's Balance Sheet?

We can see from the most recent balance sheet that JHM Consolidation Berhad had liabilities of RM90.8m falling due within a year, and liabilities of RM39.1m due beyond that. Offsetting these obligations, it had cash of RM92.9m as well as receivables valued at RM60.9m due within 12 months. So it actually has RM24.0m more liquid assets than total liabilities.

This surplus suggests that JHM Consolidation Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, JHM Consolidation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine JHM Consolidation Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, JHM Consolidation Berhad made a loss at the EBIT level, and saw its revenue drop to RM224m, which is a fall of 36%. To be frank that doesn't bode well.

So How Risky Is JHM Consolidation Berhad?

Although JHM Consolidation Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM54m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 1 warning sign with JHM Consolidation Berhad , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.