Does JMT Auto (NSE:JMTAUTOLTD) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 JMT Auto Limited (NSE:JMTAUTOLTD) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 JMT Auto

How Much Debt Does JMT Auto Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 JMT Auto had ₹1.76b of debt, an increase on ₹1.51b, over one year. Net debt is about the same, since the it doesn't have much cash.

A Look At JMT Auto's Liabilities

According to the last reported balance sheet, JMT Auto had liabilities of ₹2.49b due within 12 months, and liabilities of ₹639.4m due beyond 12 months. Offsetting this, it had ₹30.6m in cash and ₹488.5m in receivables that were due within 12 months. So it has liabilities totalling ₹2.61b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹1.34b 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'd watch its balance sheet closely, without a doubt. After all, JMT Auto would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since JMT Auto will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, JMT Auto made a loss at the EBIT level, and saw its revenue drop to ₹2.6b, which is a fall of 46%. That makes us nervous, to say the least.

Caveat Emptor

Not only did JMT Auto's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹521m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of ₹668m. In the meantime, we consider the stock to be risky. 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. For instance, we've identified 3 warning signs for JMT Auto (1 is a bit unpleasant) 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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