Does Jaiprakash Power Ventures (NSE:JPPOWER) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Jaiprakash Power Ventures Limited (NSE:JPPOWER) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jaiprakash Power Ventures

What Is Jaiprakash Power Ventures's Debt?

As you can see below, Jaiprakash Power Ventures had ₹51.6b of debt at September 2021, down from ₹55.7b a year prior. However, because it has a cash reserve of ₹2.53b, its net debt is less, at about ₹49.1b.

How Strong Is Jaiprakash Power Ventures' Balance Sheet?

According to the last reported balance sheet, Jaiprakash Power Ventures had liabilities of ₹18.9b due within 12 months, and liabilities of ₹50.1b due beyond 12 months. Offsetting these obligations, it had cash of ₹2.53b as well as receivables valued at ₹11.4b due within 12 months. So its liabilities total ₹55.1b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹33.9b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Jaiprakash Power Ventures would likely require a major re-capitalisation if it had to pay its creditors today.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Jaiprakash Power Ventures's debt to EBITDA ratio (4.8) suggests that it uses some debt, its interest cover is very weak, at 0.97, suggesting high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. More concerning, Jaiprakash Power Ventures saw its EBIT drop by 5.2% in the last twelve months. If that earnings trend continues the company will face an uphill battle to pay off its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jaiprakash Power Ventures will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Jaiprakash Power Ventures actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

On the face of it, Jaiprakash Power Ventures's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. We're quite clear that we consider Jaiprakash Power Ventures to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Jaiprakash Power Ventures (including 1 which makes us a bit uncomfortable) .

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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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.