Warren Buffett famously said, '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 can see that JBB Builders International Limited (HKG:1903) does use debt in its business. But is this debt a concern to shareholders?
Our free stock report includes 3 warning signs investors should be aware of before investing in JBB Builders International. Read for free now.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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does JBB Builders International Carry?
You can click the graphic below for the historical numbers, but it shows that JBB Builders International had RM8.46m of debt in December 2024, down from RM12.4m, one year before. However, it does have RM97.6m in cash offsetting this, leading to net cash of RM89.1m.
How Strong 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 RM149.8m due within 12 months and liabilities of RM4.67m due beyond that. On the other hand, it had cash of RM97.6m and RM134.4m worth of receivables due within a year. So it actually has RM77.6m more liquid assets than total liabilities.
This excess liquidity suggests that JBB Builders International is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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.
Check out our latest analysis for JBB Builders International
It was also good to see that despite losing money on the EBIT line last year, JBB Builders International turned things around in the last 12 months, delivering and EBIT of RM6.6m. There's no doubt that we learn most about debt from the balance sheet. But it is JBB Builders International'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. JBB Builders International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, JBB Builders International reported free cash flow worth 20% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that JBB Builders International has net cash of RM89.1m, as well as more liquid assets than liabilities. So we are not troubled with JBB Builders International's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for JBB Builders International (2 are significant) you should be aware of.
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.