Is Jaiprakash Associates (NSE:JPASSOCIAT) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Jaiprakash Associates Limited (NSE:JPASSOCIAT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jaiprakash Associates

What Is Jaiprakash Associates's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jaiprakash Associates had ₹173.9b of debt in March 2020, down from ₹284.4b, one year before. However, it does have ₹18.9b in cash offsetting this, leading to net debt of about ₹155.0b.

A Look At Jaiprakash Associates's Liabilities

Zooming in on the latest balance sheet data, we can see that Jaiprakash Associates had liabilities of ₹128.5b due within 12 months and liabilities of ₹212.6b due beyond that. Offsetting these obligations, it had cash of ₹18.9b as well as receivables valued at ₹23.1b due within 12 months. So it has liabilities totalling ₹299.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹6.98b 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, Jaiprakash Associates would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Jaiprakash Associates's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Jaiprakash Associates made a loss at the EBIT level, and saw its revenue drop to ₹71b, which is a fall of 34%. To be frank that doesn't bode well.

Caveat Emptor

While Jaiprakash Associates's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹859m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But on the bright side the company actually produced a statutory profit of ₹24b and free cash flow of ₹5.5b. So its situation may not be as precarious as the EBIT would imply. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Jaiprakash Associates (1 is concerning) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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