David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Jasco Electronics Holdings Limited (JSE: JSC) uses debt in its activities. But does this debt worry shareholders?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Jasco Electronics Holdings
How much debt does Jasco Electronics Holdings have?
You can click on the chart below for historical figures, but it shows Jasco Electronics Holdings had R157.4 million in debt in December 2021, up from R346.4 million a year earlier. However, as he has a cash reserve of R26.0 million, his net debt is lower at around R131.5 million.
How healthy is Jasco Electronics Holdings’ balance sheet?
The latest balance sheet data shows that Jasco Electronics Holdings had liabilities of R203.6 million due within one year, and liabilities of R164.9 million falling due thereafter. In return, he had R26.0 million in cash and R139.5 million in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of R203.1 million.
This deficit casts a shadow over the R95.4m company, like a towering colossus of mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Jasco Electronics Holdings would likely need a major recapitalization if its creditors were to demand repayment.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
While Jasco Electronics Holdings has a fairly reasonable net debt to EBITDA ratio of 1.8, its interest coverage looks low at 0.77. The main reason for this is that it has such high depreciation and amortization. While companies often boast that these fees are not cash, most of these companies will therefore require an ongoing investment (which is not spent). In any case, there is no doubt that the stock uses significant leverage. Notably, Jasco Electronics Holdings posted a loss in EBIT last year, but improved it to a positive EBIT of R15 million in the last twelve months. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Jasco Electronics Holdings that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Over the past year, Jasco Electronics Holdings has burned through a lot of cash. While investors no doubt expect a reversal of this situation in due course, this clearly means that its use of debt is more risky.
Our point of view
At first glance, Jasco Electronics Holdings’ EBIT-to-free-cash-flow conversion left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the darkest night. busy year. That said, its ability to manage its debt, based on its EBITDA, is not such a concern. Considering all of the above factors, it seems that Jasco Electronics Holdings is too much in debt. While some investors like this kind of risky play, it’s definitely not our cup of tea. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, Jasco Electronics Holdings has 5 warning signs (and 4 that are concerning) that we think you should know about.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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