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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, J. B. Chemicals & Pharmaceuticals had ₹816.4m of debt at September 2024, down from ₹4.27b a year prior. But it also has ₹4.17b in cash to offset that, meaning it has ₹3.35b net cash.

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

We can see from the most recent balance sheet that J. B. Chemicals & Pharmaceuticals had liabilities of ₹6.22b falling due within a year, and liabilities of ₹1.95b due beyond that. Offsetting this, it had ₹4.17b in cash and ₹8.17b in receivables that were due within 12 months. So it actually has ₹4.17b 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 it's very unlikely that the ₹271.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, J. B. Chemicals & Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that J. B. Chemicals & Pharmaceuticals grew its EBIT by 16% last year, making its debt load easier to handle. 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.

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 last three years, J. B. Chemicals & Pharmaceuticals reported free cash flow worth 4.1% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

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 ₹3.35b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. So we don't have any problem with J. B. Chemicals & Pharmaceuticals's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for J. B. Chemicals & Pharmaceuticals you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.