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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.' 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 can see that Jerash Holdings (US), Inc. (NASDAQ:JRSH) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is Jerash Holdings (US)'s Net Debt?
As you can see below, Jerash Holdings (US) had US$68.2k of debt at June 2019, down from US$7.06m a year prior. However, it does have US$16.1m in cash offsetting this, leading to net cash of US$16.1m.
How Healthy Is Jerash Holdings (US)'s Balance Sheet?
According to the last reported balance sheet, Jerash Holdings (US) had liabilities of US$7.33m due within 12 months, and liabilities of US$2.00m due beyond 12 months. On the other hand, it had cash of US$16.1m and US$13.4m worth of receivables due within a year. So it actually has US$20.2m more liquid assets than total liabilities.
It's good to see that Jerash Holdings (US) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Jerash Holdings (US) boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Jerash Holdings (US) grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jerash Holdings (US)'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jerash Holdings (US) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Jerash Holdings (US)'s free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While we empathize with investors who find debt concerning, you should keep in mind that Jerash Holdings (US) has net cash of US$16m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't think Jerash Holdings (US)'s use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Jerash Holdings (US), you may well want to click here to check an interactive graph of its earnings per share history.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.