Is Jasco Electronics Holdings (JSE:JSC) Weighed On By Its Debt Load?

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.' 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 note that Jasco Electronics Holdings Limited (JSE:JSC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jasco Electronics Holdings

What Is Jasco Electronics Holdings's Debt?

As you can see below, Jasco Electronics Holdings had R205.9m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have R31.7m in cash offsetting this, leading to net debt of about R174.2m.

How Healthy Is Jasco Electronics Holdings' Balance Sheet?

The latest balance sheet data shows that Jasco Electronics Holdings had liabilities of R386.9m due within a year, and liabilities of R72.9m falling due after that. Offsetting these obligations, it had cash of R31.7m as well as receivables valued at R113.2m due within 12 months. So its liabilities total R315.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the R49.8m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Jasco Electronics Holdings would probably need a major re-capitalization if its creditors were to demand repayment. 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 Jasco Electronics Holdings 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, Jasco Electronics Holdings made a loss at the EBIT level, and saw its revenue drop to R874m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

Not only did Jasco Electronics Holdings'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 R52m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through R108k in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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 Jasco Electronics Holdings is showing 3 warning signs in our investment analysis , and 2 of those are significant...

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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