These 4 Measures Indicate That J. B. Chemicals & Pharmaceuticals (NSE:JBCHEPHARM) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that J. B. Chemicals & Pharmaceuticals Limited (NSE:JBCHEPHARM) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that J. B. Chemicals & Pharmaceuticals had ₹3.57b of debt in March 2024, down from ₹5.48b, one year before. However, its balance sheet shows it holds ₹4.60b in cash, so it actually has ₹1.03b net cash.

A Look At J. B. Chemicals & Pharmaceuticals' Liabilities

Zooming in on the latest balance sheet data, we can see that J. B. Chemicals & Pharmaceuticals had liabilities of ₹8.68b due within 12 months and liabilities of ₹2.03b due beyond that. Offsetting these obligations, it had cash of ₹4.60b as well as receivables valued at ₹6.88b due within 12 months. So it can boast ₹770.1m 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 ₹260.6b 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.

In addition to that, we're happy to report that J. B. Chemicals & Pharmaceuticals has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case J. B. Chemicals & Pharmaceuticals has ₹1.03b in net cash and a decent-looking balance sheet. And we liked the look of last year's 34% year-on-year EBIT growth. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for J. B. Chemicals & Pharmaceuticals that 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.

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