Would Jindal Poly Films (NSE:JINDALPOLY) Be Better Off With Less Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Jindal Poly Films Limited (NSE:JINDALPOLY) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jindal Poly Films

What Is Jindal Poly Films's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jindal Poly Films had ₹44.3b of debt, an increase on ₹40.8b, over one year. On the flip side, it has ₹37.6b in cash leading to net debt of about ₹6.71b.

A Look At Jindal Poly Films' Liabilities

We can see from the most recent balance sheet that Jindal Poly Films had liabilities of ₹20.5b falling due within a year, and liabilities of ₹45.2b due beyond that. Offsetting these obligations, it had cash of ₹37.6b as well as receivables valued at ₹14.7b due within 12 months. So its liabilities total ₹13.4b more than the combination of its cash and short-term receivables.

Jindal Poly Films has a market capitalization of ₹32.1b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Jindal Poly Films's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Jindal Poly Films made a loss at the EBIT level, and saw its revenue drop to ₹39b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Jindal Poly Films's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹2.2b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹649m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Jindal Poly Films that you should be aware of.

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.

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