Is JP Nelson Holdings (Cayman) (GTSM:8418) A Risky Investment?

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.' 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 can see that JP Nelson Holdings (Cayman) (GTSM:8418) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for JP Nelson Holdings (Cayman)

How Much Debt Does JP Nelson Holdings (Cayman) Carry?

The image below, which you can click on for greater detail, shows that JP Nelson Holdings (Cayman) had debt of NT$1.44b at the end of December 2020, a reduction from NT$1.74b over a year. On the flip side, it has NT$70.1m in cash leading to net debt of about NT$1.37b.

How Strong Is JP Nelson Holdings (Cayman)'s Balance Sheet?

The latest balance sheet data shows that JP Nelson Holdings (Cayman) had liabilities of NT$1.22b due within a year, and liabilities of NT$981.8m falling due after that. On the other hand, it had cash of NT$70.1m and NT$402.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.73b.

This deficit casts a shadow over the NT$861.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, JP Nelson Holdings (Cayman) would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JP Nelson Holdings (Cayman) 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.

Over 12 months, JP Nelson Holdings (Cayman) made a loss at the EBIT level, and saw its revenue drop to NT$1.5b, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

Not only did JP Nelson Holdings (Cayman)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping NT$105m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of NT$132m. In the meantime, we consider the stock to be risky. 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. For instance, we've identified 2 warning signs for JP Nelson Holdings (Cayman) that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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