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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Jayride Group Limited (ASX:JAY) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Jayride Group
How Much Debt Does Jayride Group Carry?
As you can see below, at the end of June 2019, Jayride Group had AU$1.57m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$1.45m in cash offsetting this, leading to net debt of about AU$126.9k.
How Healthy Is Jayride Group's Balance Sheet?
The latest balance sheet data shows that Jayride Group had liabilities of AU$2.94m due within a year, and liabilities of AU$1.63m falling due after that. Offsetting this, it had AU$1.45m in cash and AU$1.88m in receivables that were due within 12 months. So its liabilities total AU$1.23m more than the combination of its cash and short-term receivables.
Of course, Jayride Group has a market capitalization of AU$32.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Jayride Group has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jayride Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Jayride Group managed to grow its revenue by 100%, to AU$3.8m. Shareholders probably have their fingers crossed that it can grow its way to profits.