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.' 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. We can see that Jadason Enterprises Ltd (SGX:J03) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Jadason Enterprises Carry?
The image below, which you can click on for greater detail, shows that at December 2020 Jadason Enterprises had debt of S$3.75m, up from S$3.11m in one year. However, its balance sheet shows it holds S$15.5m in cash, so it actually has S$11.7m net cash.
A Look At Jadason Enterprises' Liabilities
Zooming in on the latest balance sheet data, we can see that Jadason Enterprises had liabilities of S$18.4m due within 12 months and liabilities of S$12.1m due beyond that. On the other hand, it had cash of S$15.5m and S$21.0m worth of receivables due within a year. So it actually has S$5.97m more liquid assets than total liabilities.
This excess liquidity suggests that Jadason Enterprises is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face 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 it is Jadason Enterprises's earnings that will influence how the balance sheet holds up in the future. 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 had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to S$41m. We would much prefer see growth.
So How Risky Is Jadason Enterprises?
While Jadason Enterprises lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow S$6.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 - Jadason Enterprises has 1 warning sign we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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