Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.' 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. Importantly, Jatcorp Limited (ASX:JAT) does carry debt. But the more important question is: how much risk is that debt creating?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Jatcorp
As you can see below, Jatcorp had AU$3.39m of debt at June 2022, down from AU$7.83m a year prior. However, its balance sheet shows it holds AU$3.86m in cash, so it actually has AU$474.3k net cash.
Zooming in on the latest balance sheet data, we can see that Jatcorp had liabilities of AU$9.70m due within 12 months and liabilities of AU$5.62m due beyond that. Offsetting this, it had AU$3.86m in cash and AU$2.03m in receivables that were due within 12 months. So it has liabilities totalling AU$9.43m more than its cash and near-term receivables, combined.
Jatcorp has a market capitalization of AU$42.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Jatcorp boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jatcorp will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Jatcorp wasn't profitable at an EBIT level, but managed to grow its revenue by 81%, to AU$38m. Shareholders probably have their fingers crossed that it can grow its way to profits.
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. With only AU$474.3k on the balance sheet, it would appear that its going to need to raise capital again soon. Jatcorp's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Jatcorp has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
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Jatcorp Limited operates as a trade specialist of fast-moving consumer goods in Australia and China.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Mediocre balance sheet and overvalued.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Jatcorp Limited operates as a trade specialist of fast-moving consumer goods in Australia and China.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Mediocre balance sheet and overvalued.
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