Jindal Stainless (Hisar) (NSE:JSLHISAR) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Jindal Stainless (Hisar) Limited (NSE:JSLHISAR) does carry debt. But should shareholders be worried about its use of debt?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jindal Stainless (Hisar)

How Much Debt Does Jindal Stainless (Hisar) Carry?

The image below, which you can click on for greater detail, shows that Jindal Stainless (Hisar) had debt of ₹15.2b at the end of September 2021, a reduction from ₹20.9b over a year. And it doesn't have much cash, so its net debt is about the same.

How Strong 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. Offsetting this, it had ₹163.9m in cash and ₹12.9b in receivables that were due within 12 months. So it has liabilities totalling ₹32.2b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Jindal Stainless (Hisar) has a market capitalization of ₹76.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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) has a low net debt to EBITDA ratio of only 0.86. And its EBIT easily covers its interest expense, being 33.0 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Jindal Stainless (Hisar) grew its EBIT by 233% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jindal Stainless (Hisar)'s ability to maintain a healthy balance sheet going forward. 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 we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Jindal Stainless (Hisar) recorded free cash flow worth 77% 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

The good news is that Jindal Stainless (Hisar)'s demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its EBIT growth rate also supports that impression! Looking at the bigger picture, we think Jindal Stainless (Hisar)'s use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. Over time, share prices tend to follow earnings per share, so if you're interested in Jindal Stainless (Hisar), you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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