Stock Analysis

Is JP Nelson Holdings (Cayman) (GTSM:8418) Using Too Much Debt?

TPEX:8418
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, JP Nelson Holdings (Cayman) (GTSM:8418) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for JP Nelson Holdings (Cayman)

What Is JP Nelson Holdings (Cayman)'s Debt?

You can click the graphic below for the historical numbers, but it shows that JP Nelson Holdings (Cayman) had NT$1.49b of debt in September 2020, down from NT$1.87b, one year before. However, it does have NT$116.5m in cash offsetting this, leading to net debt of about NT$1.37b.

debt-equity-history-analysis
GTSM:8418 Debt to Equity History December 16th 2020

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

We can see from the most recent balance sheet that JP Nelson Holdings (Cayman) had liabilities of NT$1.22b falling due within a year, and liabilities of NT$1.10b due beyond that. Offsetting these obligations, it had cash of NT$116.5m as well as receivables valued at NT$411.1m due within 12 months. So its liabilities total NT$1.79b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the NT$944.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, JP Nelson Holdings (Cayman) would likely require a major re-capitalisation if it had to pay its creditors today. 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 JP Nelson Holdings (Cayman) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, JP Nelson Holdings (Cayman) made a loss at the EBIT level, and saw its revenue drop to NT$1.6b, which is a fall of 23%. 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). Indeed, it lost a very considerable NT$133m at the EBIT level. 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. It's fair to say the loss of NT$136m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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