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.' 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. Importantly, Jindal Stainless (Hisar) Limited (NSE:JSLHISAR) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Jindal Stainless (Hisar)
How Much Debt Does Jindal Stainless (Hisar) Carry?
The image below, which you can click on for greater detail, shows that Jindal Stainless (Hisar) had debt of ₹21.8b at the end of March 2019, a reduction from ₹29.3b over a year. On the flip side, it has ₹1.44b in cash leading to net debt of about ₹20.3b.
How Healthy Is Jindal Stainless (Hisar)'s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jindal Stainless (Hisar) had liabilities of ₹25.2b due within 12 months and liabilities of ₹20.7b due beyond that. Offsetting these obligations, it had cash of ₹1.44b as well as receivables valued at ₹10.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹34.4b.
This deficit casts a shadow over the ₹17.5b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, Jindal Stainless (Hisar) would probably need a major re-capitalization if its creditors were to demand repayment.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.