Does Jagran Prakashan (NSE:JAGRAN) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Jagran Prakashan Limited (NSE:JAGRAN) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Jagran Prakashan

How Much Debt Does Jagran Prakashan Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Jagran Prakashan had debt of ₹2.70b, up from ₹1.33b in one year. However, its balance sheet shows it holds ₹2.87b in cash, so it actually has ₹171.4m net cash.

How Strong Is Jagran Prakashan's Balance Sheet?

We can see from the most recent balance sheet that Jagran Prakashan had liabilities of ₹3.88b falling due within a year, and liabilities of ₹4.46b due beyond that. On the other hand, it had cash of ₹2.87b and ₹4.32b worth of receivables due within a year. So it has liabilities totalling ₹1.15b more than its cash and near-term receivables, combined.

Given Jagran Prakashan has a market capitalization of ₹11.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Jagran Prakashan boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Jagran Prakashan's EBIT was down 80% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jagran Prakashan'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. While Jagran Prakashan has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Jagran Prakashan actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jagran Prakashan has ₹171.4m in net cash. And it impressed us with free cash flow of ₹2.5b, being 101% of its EBIT. So we are not troubled with Jagran Prakashan's debt use. 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 Jagran Prakashan that you should be aware of before investing here.

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.

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