Health Check: How Prudently Does Jay Shree Tea & Industries (NSE:JAYSREETEA) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Jay Shree Tea & Industries Limited (NSE:JAYSREETEA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jay Shree Tea & Industries

What Is Jay Shree Tea & Industries's Debt?

As you can see below, at the end of September 2024, Jay Shree Tea & Industries had ₹3.84b of debt, up from ₹3.47b a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Jay Shree Tea & Industries' Balance Sheet?

The latest balance sheet data shows that Jay Shree Tea & Industries had liabilities of ₹6.00b due within a year, and liabilities of ₹813.4m falling due after that. On the other hand, it had cash of ₹48.5m and ₹1.14b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹5.62b.

The deficiency here weighs heavily on the ₹3.22b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Jay Shree Tea & Industries would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jay Shree Tea & Industries 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.

In the last year Jay Shree Tea & Industries's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Jay Shree Tea & Industries produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹267m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₹656m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Jay Shree Tea & Industries (including 1 which 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.