JHM Consolidation Berhad (KLSE:JHM) Has A Pretty Healthy Balance Sheet

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.' 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 JHM Consolidation Berhad (KLSE:JHM) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for JHM Consolidation Berhad

How Much Debt Does JHM Consolidation Berhad Carry?

As you can see below, JHM Consolidation Berhad had RM65.8m of debt at December 2023, down from RM68.9m a year prior. However, its balance sheet shows it holds RM78.6m in cash, so it actually has RM12.8m net cash.

A Look At JHM Consolidation Berhad's Liabilities

According to the last reported balance sheet, JHM Consolidation Berhad had liabilities of RM104.8m due within 12 months, and liabilities of RM42.7m due beyond 12 months. Offsetting these obligations, it had cash of RM78.6m as well as receivables valued at RM113.3m due within 12 months. So it actually has RM44.4m 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. 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.

It is just as well that JHM Consolidation Berhad's load is not too heavy, because its EBIT was down 38% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While JHM Consolidation Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, JHM Consolidation Berhad recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that JHM Consolidation Berhad has net cash of RM12.8m, as well as more liquid assets than liabilities. So we don't have any problem with JHM Consolidation Berhad's use of debt. 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 1 warning sign 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.