Health Check: How Prudently Does Jain Irrigation Systems (NSE:JISLDVREQS) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Jain Irrigation Systems Limited (NSE:JISLDVREQS) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jain Irrigation Systems

What Is Jain Irrigation Systems's Net Debt?

The chart below, which you can click on for greater detail, shows that Jain Irrigation Systems had ₹63.0b in debt in September 2020; about the same as the year before. However, it also had ₹3.39b in cash, and so its net debt is ₹59.6b.

How Strong Is Jain Irrigation Systems's Balance Sheet?

The latest balance sheet data shows that Jain Irrigation Systems had liabilities of ₹66.0b due within a year, and liabilities of ₹29.7b falling due after that. Offsetting this, it had ₹3.39b in cash and ₹26.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹66.2b.

This deficit casts a shadow over the ₹7.44b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Jain Irrigation Systems would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Jain Irrigation Systems'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.

Over 12 months, Jain Irrigation Systems made a loss at the EBIT level, and saw its revenue drop to ₹55b, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

While Jain Irrigation Systems's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹6.8b. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹9.3b in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jain Irrigation Systems is showing 4 warning signs in our investment analysis , and 2 of those don't sit too well with us...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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