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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Jumia Technologies AG (NYSE:JMIA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Jumia Technologies's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Jumia Technologies had €10.1m of debt, an increase on €2.24m, over one year. However, its balance sheet shows it holds €333.0m in cash, so it actually has €322.9m net cash.
How Healthy Is Jumia Technologies's Balance Sheet?
The latest balance sheet data shows that Jumia Technologies had liabilities of €111.6m due within a year, and liabilities of €6.55m falling due after that. On the other hand, it had cash of €333.0m and €26.2m worth of receivables due within a year. So it actually has €241.1m more liquid assets than total liabilities.
This luscious liquidity implies that Jumia Technologies's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Jumia Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jumia Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Jumia Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by32%, to €149m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Jumia Technologies?
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 Jumia Technologies had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of €165m and booked a €208m accounting loss. But at least it has €322.9m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Jumia Technologies may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Jumia Technologies's profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.