Just Dial (NSE:JUSTDIAL) Could Easily Take On More Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Just Dial Limited (NSE:JUSTDIAL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Just Dial

What Is Just Dial's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Just Dial had ₹873.0m of debt, an increase on ₹537.1m, over one year. However, its balance sheet shows it holds ₹42.8b in cash, so it actually has ₹41.9b net cash.

How Strong Is Just Dial's Balance Sheet?

The latest balance sheet data shows that Just Dial had liabilities of ₹5.69b due within a year, and liabilities of ₹1.88b falling due after that. Offsetting this, it had ₹42.8b in cash and ₹61.9m in receivables that were due within 12 months. So it can boast ₹35.3b more liquid assets than total liabilities.

This surplus liquidity suggests that Just Dial's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Just Dial boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Just Dial grew its EBIT by 667% over twelve months. 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 Just Dial'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Just Dial 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, Just Dial actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Just Dial has ₹41.9b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 225% of that EBIT to free cash flow, bringing in ₹2.1b. The bottom line is that Just Dial's use of debt is absolutely fine. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Just Dial you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.