Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Jain Irrigation Systems Limited (NSE:JISLJALEQS) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. 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.
What Is Jain Irrigation Systems's Net Debt?
As you can see below, Jain Irrigation Systems had ₹60.9b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₹3.39b in cash leading to net debt of about ₹57.5b.
How Healthy Is Jain Irrigation Systems' Balance Sheet?
According to the last reported balance sheet, Jain Irrigation Systems had liabilities of ₹66.0b due within 12 months, and liabilities of ₹29.7b due beyond 12 months. Offsetting these obligations, it had cash of ₹3.39b as well as receivables valued at ₹26.1b due within 12 months. So its liabilities total ₹66.2b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the ₹10.4b 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. At the end of the day, Jain Irrigation Systems 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 you can't view debt in total isolation; since Jain Irrigation Systems 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.
In the last year Jain Irrigation Systems had a loss before interest and tax, and actually shrunk its revenue by 29%, to ₹56b. That makes us nervous, to say the least.
Not only did Jain Irrigation Systems'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 ₹5.9b at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹9.3b in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Jain Irrigation Systems (2 are significant!) that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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