Here's Why Jet Freight Logistics (NSE:JETFREIGHT) Can Afford Some Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jet Freight Logistics Limited (NSE:JETFREIGHT) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jet Freight Logistics

What Is Jet Freight Logistics's Net Debt?

As you can see below, Jet Freight Logistics had ₹334.7m of debt at September 2020, down from ₹349.8m a year prior. However, it also had ₹50.5m in cash, and so its net debt is ₹284.1m.

A Look At Jet Freight Logistics' Liabilities

Zooming in on the latest balance sheet data, we can see that Jet Freight Logistics had liabilities of ₹686.1m due within 12 months and liabilities of ₹103.3m due beyond that. Offsetting this, it had ₹50.5m in cash and ₹610.7m in receivables that were due within 12 months. So it has liabilities totalling ₹128.1m more than its cash and near-term receivables, combined.

Jet Freight Logistics has a market capitalization of ₹242.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Jet Freight Logistics'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.

In the last year Jet Freight Logistics had a loss before interest and tax, and actually shrunk its revenue by 10%, to ₹3.0b. That's not what we would hope to see.

Caveat Emptor

While Jet Freight Logistics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹86m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹120m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Jet Freight Logistics you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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