Jyothy Labs (NSE:JYOTHYLAB) Has A Rock Solid Balance Sheet

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.' 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. As with many other companies Jyothy Labs Limited (NSE:JYOTHYLAB) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jyothy Labs

What Is Jyothy Labs's Debt?

You can click the graphic below for the historical numbers, but it shows that Jyothy Labs had ₹465.4m of debt in March 2023, down from ₹1.71b, one year before. But on the other hand it also has ₹2.81b in cash, leading to a ₹2.35b net cash position.

A Look At Jyothy Labs' Liabilities

We can see from the most recent balance sheet that Jyothy Labs had liabilities of ₹4.06b falling due within a year, and liabilities of ₹1.04b due beyond that. On the other hand, it had cash of ₹2.81b and ₹1.40b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹898.9m.

Having regard to Jyothy Labs' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹124.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Jyothy Labs also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Jyothy Labs grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its debt. 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 Jyothy Labs'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jyothy Labs may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Jyothy Labs generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Jyothy Labs's liabilities, but we can be reassured by the fact it has has net cash of ₹2.35b. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in ₹2.9b. So we don't think Jyothy Labs's use of debt is risky. 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. For example, we've discovered 1 warning sign for Jyothy Labs that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.