Is Jyoti CNC Automation (NSE:JYOTICNC) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Jyoti CNC Automation Limited (NSE:JYOTICNC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jyoti CNC Automation

What Is Jyoti CNC Automation's Net Debt?

As you can see below, Jyoti CNC Automation had ₹3.04b of debt at March 2024, down from ₹8.34b a year prior. But on the other hand it also has ₹3.86b in cash, leading to a ₹818.3m net cash position.

A Look At Jyoti CNC Automation's Liabilities

Zooming in on the latest balance sheet data, we can see that Jyoti CNC Automation had liabilities of ₹7.14b due within 12 months and liabilities of ₹997.9m due beyond that. On the other hand, it had cash of ₹3.86b and ₹2.57b worth of receivables due within a year. So its liabilities total ₹1.71b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Jyoti CNC Automation's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹308.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Jyoti CNC Automation also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Jyoti CNC Automation's EBIT launched higher than Elon Musk, gaining a whopping 321% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jyoti CNC Automation 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jyoti CNC Automation 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, Jyoti CNC Automation saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Jyoti CNC Automation's liabilities, but we can be reassured by the fact it has has net cash of ₹818.3m. And we liked the look of last year's 321% year-on-year EBIT growth. So we don't have any problem with Jyoti CNC Automation's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jyoti CNC Automation (of which 1 doesn't sit too well with us!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com