Is Newjaisa Technologies (NSE:NEWJAISA) Using Too Much 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.' 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 can see that Newjaisa Technologies Limited (NSE:NEWJAISA) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Newjaisa Technologies

What Is Newjaisa Technologies's Debt?

As you can see below, at the end of September 2024, Newjaisa Technologies had ₹167.9m of debt, up from ₹136.5m a year ago. Click the image for more detail. But on the other hand it also has ₹356.9m in cash, leading to a ₹189.0m net cash position.

A Look At Newjaisa Technologies' Liabilities

According to the last reported balance sheet, Newjaisa Technologies had liabilities of ₹127.5m due within 12 months, and liabilities of ₹67.6m due beyond 12 months. Offsetting these obligations, it had cash of ₹356.9m as well as receivables valued at ₹251.9m due within 12 months. So it actually has ₹413.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Newjaisa Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Newjaisa Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Newjaisa Technologies's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Newjaisa Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Newjaisa Technologies 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. During the last three years, Newjaisa Technologies burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Newjaisa Technologies has ₹189.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Newjaisa Technologies's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Newjaisa Technologies has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.