These 4 Measures Indicate That S.J.S. Enterprises (NSE:SJS) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that S.J.S. Enterprises Limited (NSE:SJS) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for S.J.S. Enterprises

What Is S.J.S. Enterprises's Debt?

The image below, which you can click on for greater detail, shows that S.J.S. Enterprises had debt of ₹245.5m at the end of September 2024, a reduction from ₹1.00b over a year. But it also has ₹460.6m in cash to offset that, meaning it has ₹215.1m net cash.

How Healthy Is S.J.S. Enterprises' Balance Sheet?

According to the last reported balance sheet, S.J.S. Enterprises had liabilities of ₹1.34b due within 12 months, and liabilities of ₹391.2m due beyond 12 months. On the other hand, it had cash of ₹460.6m and ₹1.68b worth of receivables due within a year. So it can boast ₹410.0m more liquid assets than total liabilities.

Having regard to S.J.S. Enterprises' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹25.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that S.J.S. Enterprises has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that S.J.S. Enterprises has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine S.J.S. Enterprises's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While S.J.S. Enterprises has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, S.J.S. Enterprises recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case S.J.S. Enterprises has ₹215.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 56% year-on-year EBIT growth. So we don't think S.J.S. Enterprises's use of debt is risky. We'd be very excited to see if S.J.S. Enterprises insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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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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.