These 4 Measures Indicate That Jupiter Wagons (NSE:JWL) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Jupiter Wagons Limited (NSE:JWL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jupiter Wagons

What Is Jupiter Wagons's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jupiter Wagons had debt of ₹4.39b, up from ₹3.73b in one year. However, it does have ₹10.8b in cash offsetting this, leading to net cash of ₹6.41b.

How Strong Is Jupiter Wagons' Balance Sheet?

We can see from the most recent balance sheet that Jupiter Wagons had liabilities of ₹13.2b falling due within a year, and liabilities of ₹558.8m due beyond that. Offsetting this, it had ₹10.8b in cash and ₹5.27b in receivables that were due within 12 months. So it actually has ₹2.32b more liquid assets than total liabilities.

Having regard to Jupiter Wagons' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹168.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Jupiter Wagons 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 Jupiter Wagons has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jupiter Wagons 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, a company can only pay off debt with cold hard cash, not accounting profits. Jupiter Wagons 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, Jupiter Wagons recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jupiter Wagons has ₹6.41b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 40% over the last year. So we are not troubled with Jupiter Wagons's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Jupiter Wagons you should be aware of, and 1 of them is a bit unpleasant.

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.