Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ind-Swift Laboratories Limited (NSE:INDSWFTLAB) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
How Much Debt Does Ind-Swift Laboratories Carry?
As you can see below, Ind-Swift Laboratories had ₹11.2b of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of ₹299.7m, its net debt is less, at about ₹10.9b.
A Look At Ind-Swift Laboratories's Liabilities
We can see from the most recent balance sheet that Ind-Swift Laboratories had liabilities of ₹3.31b falling due within a year, and liabilities of ₹9.80b due beyond that. Offsetting this, it had ₹299.7m in cash and ₹3.72b in receivables that were due within 12 months. So it has liabilities totalling ₹9.09b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₹2.21b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, Ind-Swift Laboratories would probably need a major re-capitalization if its creditors were to demand repayment.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Ind-Swift Laboratories shareholders face the double whammy of a high net debt to EBITDA ratio (8.7), and fairly weak interest coverage, since EBIT is just 0.61 times the interest expense. This means we'd consider it to have a heavy debt load. The good news is that Ind-Swift Laboratories improved its EBIT by 6.8% over the last twelve years, thus gradually reducing its debt levels relative to its earnings. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ind-Swift Laboratories 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Considering the last three years, Ind-Swift Laboratories actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
To be frank both Ind-Swift Laboratories's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at growing its EBIT; that's encouraging. Taking into account all the aforementioned factors, it looks like Ind-Swift Laboratories has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. While Ind-Swift Laboratories didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away.Click here to see if its earnings are heading in the right direction, over the medium term.
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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