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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Jubilant Industries Limited (NSE:JUBLINDS) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Jubilant Industries
How Much Debt Does Jubilant Industries Carry?
As you can see below, Jubilant Industries had ₹1.72b of debt at March 2019, down from ₹2.41b a year prior. However, it also had ₹44.2m in cash, and so its net debt is ₹1.68b.
How Strong Is Jubilant Industries's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jubilant Industries had liabilities of ₹1.97b due within 12 months and liabilities of ₹1.44b due beyond that. Offsetting these obligations, it had cash of ₹44.2m as well as receivables valued at ₹990.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.38b.
The deficiency here weighs heavily on the ₹1.25b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Jubilant Industries would likely require a major re-capitalisation if it had to pay its creditors today.
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.