These 4 Measures Indicate That JSW Infrastructure (NSE:JSWINFRA) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 JSW Infrastructure Limited (NSE:JSWINFRA) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for JSW Infrastructure

What Is JSW Infrastructure's Debt?

As you can see below, JSW Infrastructure had ₹43.8b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₹41.8b in cash leading to net debt of about ₹2.04b.

How Strong Is JSW Infrastructure's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JSW Infrastructure had liabilities of ₹7.28b due within 12 months and liabilities of ₹48.7b due beyond that. Offsetting these obligations, it had cash of ₹41.8b as well as receivables valued at ₹8.88b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹5.32b.

This state of affairs indicates that JSW Infrastructure's 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 ₹689.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, JSW Infrastructure has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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).

JSW Infrastructure has a low net debt to EBITDA ratio of only 0.10. And its EBIT covers its interest expense a whopping 29.0 times over. So we're pretty relaxed about its super-conservative use of debt. Also positive, JSW Infrastructure grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if JSW Infrastructure 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, JSW Infrastructure actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that JSW Infrastructure's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! We would also note that Infrastructure industry companies like JSW Infrastructure commonly do use debt without problems. We think JSW Infrastructure is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. Another factor that would give us confidence in JSW Infrastructure would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.

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