Is JHM Consolidation Berhad (KLSE:JHM) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies JHM Consolidation Berhad (KLSE:JHM) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for JHM Consolidation Berhad

What Is JHM Consolidation Berhad's Debt?

As you can see below, JHM Consolidation Berhad had RM25.3m of debt at September 2024, down from RM43.1m a year prior. However, it does have RM62.5m in cash offsetting this, leading to net cash of RM37.3m.

How Strong Is JHM Consolidation Berhad's Balance Sheet?

The latest balance sheet data shows that JHM Consolidation Berhad had liabilities of RM82.5m due within a year, and liabilities of RM35.4m falling due after that. On the other hand, it had cash of RM62.5m and RM58.1m worth of receivables due within a year. So it can boast RM2.74m more liquid assets than total liabilities.

This state of affairs indicates that JHM Consolidation Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM251.5m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that JHM Consolidation 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 ultimately the future profitability of the business will decide if JHM Consolidation Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, JHM Consolidation Berhad made a loss at the EBIT level, and saw its revenue drop to RM186m, which is a fall of 47%. That makes us nervous, to say the least.

So How Risky Is JHM Consolidation Berhad?

While JHM Consolidation Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM32m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 2 warning signs for JHM Consolidation Berhad you should be aware of.

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.