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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Jia Group Holdings limited (HKG:8519) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Jia Group Holdings
What Is Jia Group Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that Jia Group Holdings had debt of HK$6.22m at the end of June 2019, a reduction from HK$15.0m over a year. But it also has HK$7.50m in cash to offset that, meaning it has HK$1.29m net cash.
How Healthy Is Jia Group Holdings's Balance Sheet?
We can see from the most recent balance sheet that Jia Group Holdings had liabilities of HK$49.9m falling due within a year, and liabilities of HK$24.7m due beyond that. On the other hand, it had cash of HK$7.50m and HK$16.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$50.3m.
This deficit is considerable relative to its market capitalization of HK$69.7m, so it does suggest shareholders should keep an eye on Jia Group Holdings's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Jia Group Holdings 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 you can't view debt in total isolation; since Jia Group Holdings will need earnings to service that debt. 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.