Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jubilant Life Sciences Limited (NSE:JUBILANT) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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.
View our latest analysis for Jubilant Life Sciences
What Is Jubilant Life Sciences's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Jubilant Life Sciences had ₹47.2b of debt, an increase on ₹32.9b, over one year. However, it also had ₹14.8b in cash, and so its net debt is ₹32.4b.
How Healthy Is Jubilant Life Sciences's Balance Sheet?
We can see from the most recent balance sheet that Jubilant Life Sciences had liabilities of ₹20.9b falling due within a year, and liabilities of ₹45.7b due beyond that. Offsetting this, it had ₹14.8b in cash and ₹16.5b in receivables that were due within 12 months. So its liabilities total ₹35.3b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Jubilant Life Sciences has a market capitalization of ₹87.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).