Here's Why Jyoti Structures (NSE:JYOTISTRUC) Can Afford Some Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Jyoti Structures Limited (NSE:JYOTISTRUC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jyoti Structures

What Is Jyoti Structures's Debt?

You can click the graphic below for the historical numbers, but it shows that Jyoti Structures had ₹16.9b of debt in March 2022, down from ₹74.1b, one year before. However, it also had ₹854.5m in cash, and so its net debt is ₹16.1b.

How Healthy Is Jyoti Structures' Balance Sheet?

According to the last reported balance sheet, Jyoti Structures had liabilities of ₹1.65b due within 12 months, and liabilities of ₹18.8b due beyond 12 months. Offsetting this, it had ₹854.5m in cash and ₹19.1b in receivables that were due within 12 months. So it has liabilities totalling ₹504.3m more than its cash and near-term receivables, combined.

Of course, Jyoti Structures has a market capitalization of ₹9.52b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Structures will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

While it hasn't made a profit, at least Jyoti Structures booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Importantly, Jyoti Structures had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹435m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹1.0b in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Jyoti Structures (including 3 which are a bit unpleasant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.