Is Jadason Enterprises (SGX:J03) Using Debt In A Risky Way?

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. We note that Jadason Enterprises Ltd (SGX:J03) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jadason Enterprises

What Is Jadason Enterprises's Net Debt?

The chart below, which you can click on for greater detail, shows that Jadason Enterprises had S$3.84m in debt in December 2021; about the same as the year before. But it also has S$17.7m in cash to offset that, meaning it has S$13.9m net cash.

How Healthy Is Jadason Enterprises' Balance Sheet?

The latest balance sheet data shows that Jadason Enterprises had liabilities of S$18.5m due within a year, and liabilities of S$9.46m falling due after that. Offsetting this, it had S$17.7m in cash and S$13.3m in receivables that were due within 12 months. So it actually has S$3.03m more liquid assets than total liabilities.

It's good to see that Jadason Enterprises has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Jadason Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jadason Enterprises 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 Jadason Enterprises wasn't profitable at an EBIT level, but managed to grow its revenue by 4.1%, to S$43m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Jadason Enterprises?

Although Jadason Enterprises had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of S$5.0m. 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. For example, we've discovered 3 warning signs for Jadason Enterprises (2 are concerning!) that you should be aware of before investing here.

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.

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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.