Is Jindal Stainless (Hisar) (NSE:JSLHISAR) Using Too Much 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Jindal Stainless (Hisar) Limited (NSE:JSLHISAR) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jindal Stainless (Hisar)

What Is Jindal Stainless (Hisar)'s Debt?

The image below, which you can click on for greater detail, shows that Jindal Stainless (Hisar) had debt of ₹15.4b at the end of September 2021, a reduction from ₹21.1b over a year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Jindal Stainless (Hisar)'s Balance Sheet?

We can see from the most recent balance sheet that Jindal Stainless (Hisar) had liabilities of ₹33.5b falling due within a year, and liabilities of ₹11.7b due beyond that. On the other hand, it had cash of ₹163.9m and ₹12.9b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹32.2b.

Jindal Stainless (Hisar) has a market capitalization of ₹80.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Jindal Stainless (Hisar)'s net debt is only 0.78 times its EBITDA. And its EBIT covers its interest expense a whopping 104 times over. So we're pretty relaxed about its super-conservative use of debt. Better yet, Jindal Stainless (Hisar) grew its EBIT by 179% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jindal Stainless (Hisar) 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, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Jindal Stainless (Hisar) recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Jindal Stainless (Hisar)'s impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! Zooming out, Jindal Stainless (Hisar) seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. To that end, you should be aware of the 1 warning sign we've spotted with Jindal Stainless (Hisar) .

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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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.