Jindal Drilling & Industries (NSE:JINDRILL) Use Of Debt Could Be Considered Risky

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. Importantly, Jindal Drilling & Industries Limited (NSE:JINDRILL) does carry debt. 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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jindal Drilling & Industries

How Much Debt Does Jindal Drilling & Industries Carry?

The image below, which you can click on for greater detail, shows that Jindal Drilling & Industries had debt of ₹4.26b at the end of September 2020, a reduction from ₹4.55b over a year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Jindal Drilling & Industries's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jindal Drilling & Industries had liabilities of ₹2.91b due within 12 months and liabilities of ₹3.43b due beyond that. Offsetting these obligations, it had cash of ₹63.5m as well as receivables valued at ₹1.36b due within 12 months. So it has liabilities totalling ₹4.92b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹2.05b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Jindal Drilling & Industries would probably need a major re-capitalization if its creditors were to demand repayment.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely Jindal Drilling & Industries has a sky high EBITDA ratio of 11.0, implying high debt, but a strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! Notably, Jindal Drilling & Industries made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹56m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jindal Drilling & Industries'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Jindal Drilling & Industries burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Jindal Drilling & Industries's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Taking into account all the aforementioned factors, it looks like Jindal Drilling & Industries has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. To that end, you should learn about the 4 warning signs we've spotted with Jindal Drilling & Industries (including 2 which is make us uncomfortable) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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