These 4 Measures Indicate That JHM Consolidation Berhad (KLSE:JHM) Is Using Debt Extensively

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.' 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for JHM Consolidation Berhad

How Much Debt Does JHM Consolidation Berhad Carry?

As you can see below, JHM Consolidation Berhad had RM51.8m of debt at March 2023, down from RM63.4m a year prior. But it also has RM56.7m in cash to offset that, meaning it has RM4.89m net cash.

A Look At JHM Consolidation Berhad's Liabilities

We can see from the most recent balance sheet that JHM Consolidation Berhad had liabilities of RM131.5m falling due within a year, and liabilities of RM36.1m due beyond that. Offsetting these obligations, it had cash of RM56.7m as well as receivables valued at RM164.5m due within 12 months. So it actually has RM53.7m 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.

The modesty of its debt load may become crucial for JHM Consolidation Berhad if management cannot prevent a repeat of the 33% cut to EBIT 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. JHM Consolidation Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, JHM Consolidation Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that JHM Consolidation Berhad has net cash of RM4.89m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about JHM Consolidation Berhad's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - JHM Consolidation Berhad has 2 warning signs we think 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.