Jakharia Fabric (NSE:JAKHARIA) Is Carrying A Fair Bit Of 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jakharia Fabric Limited (NSE:JAKHARIA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jakharia Fabric

What Is Jakharia Fabric's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Jakharia Fabric had ₹259.7m of debt, an increase on ₹246.0m, over one year. However, it also had ₹9.70m in cash, and so its net debt is ₹250.0m.

A Look At Jakharia Fabric's Liabilities

Zooming in on the latest balance sheet data, we can see that Jakharia Fabric had liabilities of ₹263.2m due within 12 months and liabilities of ₹246.9m due beyond that. Offsetting these obligations, it had cash of ₹9.70m as well as receivables valued at ₹134.0m due within 12 months. So it has liabilities totalling ₹366.4m more than its cash and near-term receivables, combined.

Jakharia Fabric has a market capitalization of ₹650.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jakharia Fabric's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Jakharia Fabric wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to ₹678m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Jakharia Fabric managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at ₹49m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 ₹49m 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jakharia Fabric you should know about.

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.