Health Check: How Prudently Does JanOne (NASDAQ:JAN) Use Debt?

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.' 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 JanOne Inc. (NASDAQ:JAN) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for JanOne

How Much Debt Does JanOne Carry?

The image below, which you can click on for greater detail, shows that JanOne had debt of US$3.13m at the end of October 2021, a reduction from US$4.33m over a year. However, because it has a cash reserve of US$2.82m, its net debt is less, at about US$312.0k.

How Strong Is JanOne's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JanOne had liabilities of US$20.6m due within 12 months and liabilities of US$4.30m due beyond that. Offsetting these obligations, it had cash of US$2.82m as well as receivables valued at US$5.53m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$16.5m.

This deficit casts a shadow over the US$10.4m 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 it is JanOne's earnings that will influence how the balance sheet holds up in the future. 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, JanOne reported revenue of US$39m, which is a gain of 7.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, JanOne had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$8.3m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous 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$5.2m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. 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 2 of those are potentially serious...

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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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.