Is Johnson Controls-Hitachi Air Conditioning India (NSE:JCHAC) 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.' 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. We note that Johnson Controls-Hitachi Air Conditioning India Limited (NSE:JCHAC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Johnson Controls-Hitachi Air Conditioning India

What Is Johnson Controls-Hitachi Air Conditioning India's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Johnson Controls-Hitachi Air Conditioning India had debt of ₹1.93b, up from ₹1.12b in one year. On the flip side, it has ₹221.2m in cash leading to net debt of about ₹1.71b.

A Look At Johnson Controls-Hitachi Air Conditioning India's Liabilities

The latest balance sheet data shows that Johnson Controls-Hitachi Air Conditioning India had liabilities of ₹10.0b due within a year, and liabilities of ₹1.25b falling due after that. On the other hand, it had cash of ₹221.2m and ₹3.26b worth of receivables due within a year. So it has liabilities totalling ₹7.81b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Johnson Controls-Hitachi Air Conditioning India is worth ₹31.2b, and thus could probably raise enough capital to shore up 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 future earnings, more than anything, that will determine Johnson Controls-Hitachi Air Conditioning India's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Johnson Controls-Hitachi Air Conditioning India made a loss at the EBIT level, and saw its revenue drop to ₹19b, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While Johnson Controls-Hitachi Air Conditioning India's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹1.3b at the EBIT level. 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. However, it doesn't help that it burned through ₹788m of cash over the last year. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Johnson Controls-Hitachi Air Conditioning India's profit, revenue, and operating cashflow have changed over the last few years.

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.