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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Jatcorp Limited (ASX:JAT) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Jatcorp's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Jatcorp had AU$3.39m of debt in June 2022, down from AU$7.83m, one year before. However, it does have AU$3.86m in cash offsetting this, leading to net cash of AU$474.3k.
How Healthy Is Jatcorp's Balance Sheet?
The latest balance sheet data shows that Jatcorp had liabilities of AU$9.70m due within a year, and liabilities of AU$5.62m falling due after that. On the other hand, it had cash of AU$3.86m and AU$2.03m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$9.43m.
Given Jatcorp has a market capitalization of AU$47.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jatcorp also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jatcorp'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 Jatcorp wasn't profitable at an EBIT level, but managed to grow its revenue by 81%, to AU$38m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Jatcorp?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Jatcorp had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$4.4m of cash and made a loss of AU$7.0m. Given it only has net cash of AU$474.3k, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Jatcorp may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should learn about the 4 warning signs we've spotted with Jatcorp (including 2 which are a bit concerning) .
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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