JTEKT India (NSE:JTEKTINDIA) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. We can see that JTEKT India Limited (NSE:JTEKTINDIA) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 JTEKT India

What Is JTEKT India's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 JTEKT India had ₹1.10b of debt, an increase on ₹577.1m, over one year. However, it does have ₹753.6m in cash offsetting this, leading to net debt of about ₹342.3m.

How Healthy Is JTEKT India's Balance Sheet?

According to the last reported balance sheet, JTEKT India had liabilities of ₹3.79b due within 12 months, and liabilities of ₹744.7m due beyond 12 months. On the other hand, it had cash of ₹753.6m and ₹3.30b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹473.2m.

Having regard to JTEKT India's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹49.2b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, JTEKT India has a very light debt load indeed.

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.

JTEKT India's net debt is only 0.16 times its EBITDA. And its EBIT easily covers its interest expense, being 21.8 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that JTEKT India grew its EBIT at 18% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if JTEKT India can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Considering the last three years, JTEKT India actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

JTEKT India's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. Looking at all the aforementioned factors together, it strikes us that JTEKT India can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with JTEKT India .

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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