Is Jay Shree Tea & Industries (NSE:JAYSREETEA) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Jay Shree Tea & Industries Limited (NSE:JAYSREETEA) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jay Shree Tea & Industries

What Is Jay Shree Tea & Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Jay Shree Tea & Industries had ₹4.34b of debt, an increase on ₹3.44b, over one year. However, it also had ₹107.6m in cash, and so its net debt is ₹4.23b.

A Look At Jay Shree Tea & Industries' Liabilities

The latest balance sheet data shows that Jay Shree Tea & Industries had liabilities of ₹5.64b due within a year, and liabilities of ₹1.09b falling due after that. Offsetting these obligations, it had cash of ₹107.6m as well as receivables valued at ₹796.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹5.83b.

The deficiency here weighs heavily on the ₹2.13b 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 definitely think shareholders need to watch this one closely. At the end of the day, Jay Shree Tea & Industries would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jay Shree Tea & Industries's earnings that will influence how the balance sheet holds up in the future. 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, Jay Shree Tea & Industries made a loss at the EBIT level, and saw its revenue drop to ₹7.3b, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

Not only did Jay Shree Tea & Industries's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹163m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₹435m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jay Shree Tea & Industries is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.