JNK India (NSE:JNKINDIA) Seems To Use Debt Quite Sensibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, JNK India Limited (NSE:JNKINDIA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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.

View our latest analysis for JNK India

What Is JNK India's Net Debt?

The image below, which you can click on for greater detail, shows that JNK India had debt of ₹220.9m at the end of September 2024, a reduction from ₹547.8m over a year. However, it does have ₹2.17b in cash offsetting this, leading to net cash of ₹1.95b.

How Strong Is JNK India's Balance Sheet?

We can see from the most recent balance sheet that JNK India had liabilities of ₹2.67b falling due within a year, and liabilities of ₹204.1m due beyond that. Offsetting this, it had ₹2.17b in cash and ₹2.48b in receivables that were due within 12 months. So it can boast ₹1.77b more liquid assets than total liabilities.

This surplus suggests that JNK India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that JNK India has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, JNK India grew its EBIT by 6.3% in the last year, making that debt load look even more manageable. 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 JNK India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. JNK India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, JNK India saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case JNK India has ₹1.95b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 6.3% in the last twelve months. So we don't have any problem with JNK India's use of debt. 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. Case in point: We've spotted 2 warning signs for JNK India you should be aware of, and 1 of them is a bit concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.