In This Article:
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Jayant Agro-Organics Limited (NSE:JAYAGROGN) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Jayant Agro-Organics
What Is Jayant Agro-Organics's Net Debt?
As you can see below, Jayant Agro-Organics had ₹4.50b of debt at March 2019, down from ₹5.63b a year prior. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is Jayant Agro-Organics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jayant Agro-Organics had liabilities of ₹5.73b due within 12 months and liabilities of ₹503.0m due beyond that. Offsetting this, it had ₹57.8m in cash and ₹2.81b in receivables that were due within 12 months. So its liabilities total ₹3.36b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of ₹4.44b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
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.
Jayant Agro-Organics's debt is 3.5 times its EBITDA, and its EBIT cover its interest expense 3.1 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Investors should also be troubled by the fact that Jayant Agro-Organics saw its EBIT drop by 19% over the last twelve months. If that's the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jayant Agro-Organics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.