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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Jaiprakash Associates Limited (NSE:JPASSOCIAT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Jaiprakash Associates

What Is Jaiprakash Associates's Debt?

You can click the graphic below for the historical numbers, but it shows that Jaiprakash Associates had ₹173.2b of debt in March 2020, down from ₹257.2b, one year before. On the flip side, it has ₹18.9b in cash leading to net debt of about ₹154.3b.

How Healthy Is Jaiprakash Associates's Balance Sheet?

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 ₹42.4b due within 12 months. So it has liabilities totalling ₹279.8b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹7.49b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Jaiprakash Associates 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 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 ₹65b, which is a fall of 39%. That makes us nervous, to say the least.

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. Its EBIT loss was a whopping ₹1.5b. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But we note that trailing twelve month EBIT is worse than the free cash flow of ₹5.5b and the profit of ₹22b. So its situation may not be as precarious as the EBIT would imply. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Jaiprakash Associates (including 1 which is is potentially serious) .

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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