Jayant Agro-Organics (NSE:JAYAGROGN) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Jayant Agro-Organics Limited (NSE:JAYAGROGN) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jayant Agro-Organics

How Much Debt Does Jayant Agro-Organics Carry?

As you can see below, Jayant Agro-Organics had ₹1.25b of debt at September 2020, down from ₹4.68b a year prior. However, it does have ₹93.1m in cash offsetting this, leading to net debt of about ₹1.16b.

How Healthy Is Jayant Agro-Organics's Balance Sheet?

According to the last reported balance sheet, Jayant Agro-Organics had liabilities of ₹2.27b due within 12 months, and liabilities of ₹391.9m due beyond 12 months. On the other hand, it had cash of ₹93.1m and ₹1.14b worth of receivables due within a year. So its liabilities total ₹1.43b more than the combination of its cash and short-term receivables.

Jayant Agro-Organics has a market capitalization of ₹3.57b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jayant Agro-Organics will need earnings to service that debt. 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, Jayant Agro-Organics made a loss at the EBIT level, and saw its revenue drop to ₹15b, which is a fall of 47%. That makes us nervous, to say the least.

Caveat Emptor

While Jayant Agro-Organics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹385m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹344m into a profit. In the meantime, we consider the stock very risky. 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. For example, we've discovered 2 warning signs for Jayant Agro-Organics (1 is a bit concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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