Jay Shree Tea & Industries (NSE:JAYSREETEA) Has A Somewhat Strained Balance Sheet

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, Jay Shree Tea & Industries Limited (NSE:JAYSREETEA) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Jay Shree Tea & Industries had ₹4.30b of debt, an increase on ₹3.22b, over one year. However, because it has a cash reserve of ₹156.8m, its net debt is less, at about ₹4.14b.

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

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. On the other hand, it had cash of ₹156.8m and ₹619.1m worth of receivables due within a year. So its liabilities total ₹5.96b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹2.20b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Jay Shree Tea & Industries would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.18 times and a disturbingly high net debt to EBITDA ratio of 13.5 hit our confidence in Jay Shree Tea & Industries like a one-two punch to the gut. The debt burden here is substantial. Even worse, Jay Shree Tea & Industries saw its EBIT tank 83% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last two years, Jay Shree Tea & Industries generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

To be frank both Jay Shree Tea & Industries's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Taking into account all the aforementioned factors, it looks like Jay Shree Tea & Industries has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Jay Shree Tea & Industries you should be aware of, and 1 of them shouldn't be ignored.

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.