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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that JMT Auto Limited (NSE:JMTAUTOLTD) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for JMT Auto
What Is JMT Auto's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 JMT Auto had ₹1.75b of debt, an increase on ₹1.56b, over one year. However, because it has a cash reserve of ₹44.1m, its net debt is less, at about ₹1.70b.
A Look At JMT Auto's Liabilities
According to the last reported balance sheet, JMT Auto had liabilities of ₹2.39b due within 12 months, and liabilities of ₹794.5m due beyond 12 months. Offsetting this, it had ₹44.1m in cash and ₹602.5m in receivables that were due within 12 months. So it has liabilities totalling ₹2.54b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₹690.3m 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, JMT Auto 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 JMT Auto'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, JMT Auto reported revenue of ₹5.6b, which is a gain of 38%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, JMT Auto still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost ₹8.0m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹91m in the last year. So we think this stock is quite risky, like eating chicken you think might look too pink. We'd prefer pass. For riskier companies like JMT Auto I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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