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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Atlas Cycles (Haryana) Limited (NSE:ATLASCYCLE) makes use of 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. 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. 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.
What Is Atlas Cycles (Haryana)'s Debt?
As you can see below, at the end of March 2019, Atlas Cycles (Haryana) had ₹607.5m of debt, up from ₹527.5m a year ago. Click the image for more detail. However, it also had ₹52.7m in cash, and so its net debt is ₹554.8m.
How Healthy Is Atlas Cycles (Haryana)'s Balance Sheet?
We can see from the most recent balance sheet that Atlas Cycles (Haryana) had liabilities of ₹2.10b falling due within a year, and liabilities of ₹280.7m due beyond that. On the other hand, it had cash of ₹52.7m and ₹1.20b worth of receivables due within a year. So it has liabilities totalling ₹1.13b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the ₹370.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, Atlas Cycles (Haryana) would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Atlas Cycles (Haryana) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Atlas Cycles (Haryana) had negative earnings before interest and tax, and actually shrunk its revenue by 25%, to ₹4.7b. That makes us nervous, to say the least.
While Atlas Cycles (Haryana)'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 ₹587m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹528m in the last year. So while it will probably survive, we think it's risky; we'd treat it like chicken pox and try to avoid it. For riskier companies like Atlas Cycles (Haryana) I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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