J. B. Chemicals & Pharmaceuticals (NSE:JBCHEPHARM) Seems To Use Debt Quite Sensibly

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.' 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 note that J. B. Chemicals & Pharmaceuticals Limited (NSE:JBCHEPHARM) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that J. B. Chemicals & Pharmaceuticals had debt of ₹263.2m at the end of March 2022, a reduction from ₹326.4m over a year. But on the other hand it also has ₹566.5m in cash, leading to a ₹303.4m net cash position.

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

According to the last reported balance sheet, J. B. Chemicals & Pharmaceuticals had liabilities of ₹3.84b due within 12 months, and liabilities of ₹850.7m due beyond 12 months. On the other hand, it had cash of ₹566.5m and ₹5.98b worth of receivables due within a year. So it actually has ₹1.86b more liquid assets than total liabilities.

This state of affairs indicates that J. B. Chemicals & Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹136.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that J. B. Chemicals & Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that J. B. Chemicals & Pharmaceuticals saw its EBIT decline by 3.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Considering the last three years, J. B. Chemicals & Pharmaceuticals actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case J. B. Chemicals & Pharmaceuticals has ₹303.4m in net cash and a decent-looking balance sheet. So we are not troubled with J. B. Chemicals & Pharmaceuticals's debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with J. B. Chemicals & Pharmaceuticals (including 1 which shouldn't be ignored) .

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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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.