These 4 Measures Indicate That Jyothy Labs (NSE:JYOTHYLAB) Is Using Debt Safely

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.' 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. We note that Jyothy Labs Limited (NSE:JYOTHYLAB) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jyothy Labs

What Is Jyothy Labs's Debt?

As you can see below, Jyothy Labs had ₹448.4m of debt at September 2023, down from ₹1.60b a year prior. However, its balance sheet shows it holds ₹4.46b in cash, so it actually has ₹4.01b net cash.

A Look At Jyothy Labs' Liabilities

The latest balance sheet data shows that Jyothy Labs had liabilities of ₹4.69b due within a year, and liabilities of ₹1.10b falling due after that. Offsetting this, it had ₹4.46b in cash and ₹1.80b in receivables that were due within 12 months. So it actually has ₹471.2m more liquid assets than total liabilities.

This state of affairs indicates that Jyothy Labs' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹173.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Jyothy Labs has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Jyothy Labs has boosted its EBIT by 78%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jyothy Labs can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Happily for any shareholders, Jyothy Labs actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jyothy Labs has net cash of ₹4.01b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹5.0b, being 104% of its EBIT. So we don't think Jyothy Labs's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Jyothy Labs , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.