Is Jyoti Structures (NSE:JYOTISTRUC) Using Too Much 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. Importantly, Jyoti Structures Limited (NSE:JYOTISTRUC) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jyoti Structures

How Much Debt Does Jyoti Structures Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Jyoti Structures had debt of ₹18.0b, up from ₹16.9b in one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Jyoti Structures' Balance Sheet?

The latest balance sheet data shows that Jyoti Structures had liabilities of ₹3.72b due within a year, and liabilities of ₹18.9b falling due after that. Offsetting these obligations, it had cash of ₹306.2m as well as receivables valued at ₹20.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.64b.

This deficit isn't so bad because Jyoti Structures is worth ₹7.43b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Jyoti Structures reported revenue of ₹2.3b, which is a gain of 5,123%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Jyoti Structures still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹176m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹543m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Jyoti Structures you should be aware of, and 1 of them is significant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.