Does JanOne (NASDAQ:JAN) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that JanOne Inc. (NASDAQ:JAN) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for JanOne

What Is JanOne's Debt?

As you can see below, JanOne had US$2.77m of debt, at July 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$1.18m in cash, and so its net debt is US$1.59m.

How Strong Is JanOne's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JanOne had liabilities of US$18.9m due within 12 months and liabilities of US$5.42m due beyond that. Offsetting this, it had US$1.18m in cash and US$4.29m in receivables that were due within 12 months. So it has liabilities totalling US$18.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$10.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, JanOne would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JanOne 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 JanOne wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to US$43m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months JanOne produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$4.4m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$2.6m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that JanOne is showing 5 warning signs in our investment analysis , and 3 of those don't sit too well with us...

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.