Does J. B. Chemicals & Pharmaceuticals (NSE:JBCHEPHARM) Have A Healthy Balance Sheet?

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. We can see that J. B. Chemicals & Pharmaceuticals Limited (NSE:JBCHEPHARM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for J. B. Chemicals & Pharmaceuticals

What Is J. B. Chemicals & Pharmaceuticals's Debt?

As you can see below, at the end of September 2021, J. B. Chemicals & Pharmaceuticals had ₹554.7m of debt, up from ₹376.2m a year ago. Click the image for more detail. But on the other hand it also has ₹7.67b in cash, leading to a ₹7.12b net cash position.

How Strong Is J. B. Chemicals & Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that J. B. Chemicals & Pharmaceuticals had liabilities of ₹3.27b due within a year, and liabilities of ₹1.06b falling due after that. On the other hand, it had cash of ₹7.67b and ₹4.72b worth of receivables due within a year. So it actually has ₹8.06b more liquid assets than total liabilities.

This surplus suggests that J. B. Chemicals & Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, J. B. Chemicals & Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

While J. B. Chemicals & Pharmaceuticals doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine J. B. Chemicals & Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. J. B. Chemicals & Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, J. B. Chemicals & Pharmaceuticals recorded free cash flow worth 58% 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.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that J. B. Chemicals & Pharmaceuticals has net cash of ₹7.12b, as well as more liquid assets than liabilities. So we don't think J. B. Chemicals & Pharmaceuticals's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for J. B. Chemicals & Pharmaceuticals 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.