We Think J. Kumar Infraprojects (NSE:JKIL) Can Stay On Top Of Its Debt

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 note that J. Kumar Infraprojects Limited (NSE:JKIL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for J. Kumar Infraprojects

How Much Debt Does J. Kumar Infraprojects Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 J. Kumar Infraprojects had ₹6.43b of debt, an increase on ₹4.46b, over one year. However, it also had ₹4.09b in cash, and so its net debt is ₹2.34b.

A Look At J. Kumar Infraprojects' Liabilities

Zooming in on the latest balance sheet data, we can see that J. Kumar Infraprojects had liabilities of ₹16.8b due within 12 months and liabilities of ₹2.77b due beyond that. Offsetting these obligations, it had cash of ₹4.09b as well as receivables valued at ₹11.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.68b.

Of course, J. Kumar Infraprojects has a market capitalization of ₹49.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

J. Kumar Infraprojects's net debt is only 0.38 times its EBITDA. And its EBIT easily covers its interest expense, being 18.0 times the size. So we're pretty relaxed about its super-conservative use of debt. The good news is that J. Kumar Infraprojects has increased its EBIT by 7.9% over twelve months, which should ease any concerns about debt repayment. 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 J. Kumar Infraprojects 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, J. Kumar Infraprojects created free cash flow amounting to 20% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

J. Kumar Infraprojects'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 truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Looking at all the aforementioned factors together, it strikes us that J. Kumar Infraprojects 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for J. Kumar Infraprojects that you should be aware of.

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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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.