Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that JBB Builders International Limited (HKG:1903) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for JBB Builders International
How Much Debt Does JBB Builders International Carry?
As you can see below, JBB Builders International had RM12.4m of debt at December 2023, down from RM16.1m a year prior. But on the other hand it also has RM83.9m in cash, leading to a RM71.5m net cash position.
How Healthy Is JBB Builders International's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that JBB Builders International had liabilities of RM111.7m due within 12 months and liabilities of RM8.70m due beyond that. Offsetting these obligations, it had cash of RM83.9m as well as receivables valued at RM107.6m due within 12 months. So it actually has RM71.1m more liquid assets than total liabilities.
This excess liquidity is a great indication that JBB Builders International's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that JBB Builders International has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JBB Builders International 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, JBB Builders International made a loss at the EBIT level, and saw its revenue drop to RM225m, which is a fall of 40%. To be frank that doesn't bode well.
So How Risky Is JBB Builders International?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months JBB Builders International lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM18m of cash and made a loss of RM15m. Given it only has net cash of RM71.5m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for JBB Builders International (of which 1 makes us a bit uncomfortable!) you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.