Here's Why J.W. Mays (NASDAQ:MAYS) Can Afford Some Debt

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.' 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. As with many other companies J.W. Mays, Inc. (NASDAQ:MAYS) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for J.W. Mays

What Is J.W. Mays's Debt?

You can click the graphic below for the historical numbers, but it shows that J.W. Mays had US$8.52m of debt in April 2021, down from US$9.62m, one year before. However, because it has a cash reserve of US$2.32m, its net debt is less, at about US$6.21m.

How Strong Is J.W. Mays' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that J.W. Mays had liabilities of US$4.97m due within 12 months and liabilities of US$39.9m due beyond that. Offsetting these obligations, it had cash of US$2.32m as well as receivables valued at US$2.38m due within 12 months. So it has liabilities totalling US$40.2m more than its cash and near-term receivables, combined.

J.W. Mays has a market capitalization of US$77.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is J.W. Mays'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.

In the last year J.W. Mays had a loss before interest and tax, and actually shrunk its revenue by 5.9%, to US$19m. That's not what we would hope to see.

Caveat Emptor

Importantly, J.W. Mays had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$1.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$151k of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that J.W. Mays is showing 3 warning signs in our investment analysis , and 2 of those are concerning...

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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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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