We Think J. B. Chemicals & Pharmaceuticals (NSE:JBCHEPHARM) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, J. B. Chemicals & Pharmaceuticals Limited (NSE:JBCHEPHARM) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for J. B. Chemicals & Pharmaceuticals

How Much Debt Does J. B. Chemicals & Pharmaceuticals Carry?

As you can see below, at the end of September 2023, J. B. Chemicals & Pharmaceuticals had ₹4.27b of debt, up from ₹3.50b a year ago. Click the image for more detail. However, it does have ₹3.93b in cash offsetting this, leading to net debt of about ₹338.1m.

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

Zooming in on the latest balance sheet data, we can see that J. B. Chemicals & Pharmaceuticals had liabilities of ₹6.43b due within 12 months and liabilities of ₹4.40b due beyond that. Offsetting this, it had ₹3.93b in cash and ₹7.16b in receivables that were due within 12 months. So it can boast ₹267.6m more liquid assets than total liabilities.

Having regard to J. B. Chemicals & Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹215.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, J. B. Chemicals & Pharmaceuticals has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

J. B. Chemicals & Pharmaceuticals has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.041 and EBIT of 17.1 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. In addition to that, we're happy to report that J. B. Chemicals & Pharmaceuticals has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if J. B. Chemicals & Pharmaceuticals can strengthen its balance sheet over time. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, J. B. Chemicals & Pharmaceuticals recorded negative free cash flow, in total. 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.

Our View

J. B. Chemicals & Pharmaceuticals's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. When we consider the range of factors above, it looks like J. B. Chemicals & Pharmaceuticals is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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. To that end, you should be aware of the 2 warning signs we've spotted with J. B. Chemicals & Pharmaceuticals .

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.