Health Check: How Prudently Does Jaiprakash Associates (NSE:JPASSOCIAT) Use Debt?

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.' 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. As with many other companies Jaiprakash Associates Limited (NSE:JPASSOCIAT) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jaiprakash Associates

How Much Debt Does Jaiprakash Associates Carry?

You can click the graphic below for the historical numbers, but it shows that Jaiprakash Associates had ₹168.0b of debt in September 2020, down from ₹253.4b, one year before. However, it also had ₹20.2b in cash, and so its net debt is ₹147.8b.

A Look At Jaiprakash Associates' Liabilities

According to the last reported balance sheet, Jaiprakash Associates had liabilities of ₹132.4b due within 12 months, and liabilities of ₹213.7b due beyond 12 months. Offsetting these obligations, it had cash of ₹20.2b as well as receivables valued at ₹19.9b due within 12 months. So it has liabilities totalling ₹306.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹18.0b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Jaiprakash Associates would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jaiprakash Associates will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Jaiprakash Associates had a loss before interest and tax, and actually shrunk its revenue by 39%, to ₹62b. That makes us nervous, to say the least.

Caveat Emptor

While Jaiprakash Associates's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹3.3b at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But on the bright side the company actually produced a statutory profit of ₹18b and free cash flow of ₹7.0b. So while its ongoing EBIT might disappoint, it has a fair bit going for it! 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. For instance, we've identified 3 warning signs for Jaiprakash Associates (1 shouldn't be ignored) you should be aware of.

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. 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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