Suumaya Lifestyle (NSE:SUULD) Has A Pretty Healthy Balance Sheet
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. We note that Suumaya Lifestyle Limited (NSE:SUULD) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Suumaya Lifestyle
How Much Debt Does Suumaya Lifestyle Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Suumaya Lifestyle had debt of ₹117.7m, up from ₹10.3m in one year. However, because it has a cash reserve of ₹54.4m, its net debt is less, at about ₹63.4m.
How Healthy Is Suumaya Lifestyle's Balance Sheet?
According to the last reported balance sheet, Suumaya Lifestyle had liabilities of ₹321.1m due within 12 months, and liabilities of ₹118.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹54.4m as well as receivables valued at ₹510.5m due within 12 months. So it actually has ₹125.3m more liquid assets than total liabilities.
This excess liquidity suggests that Suumaya Lifestyle is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Suumaya Lifestyle has a low net debt to EBITDA ratio of only 1.2. And its EBIT easily covers its interest expense, being 79.7 times the size. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that Suumaya Lifestyle grew its EBIT by 144% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Suumaya Lifestyle 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. Over the last three years, Suumaya Lifestyle reported free cash flow worth 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Our View
The good news is that Suumaya Lifestyle's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Looking at the bigger picture, we think Suumaya Lifestyle's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Suumaya Lifestyle's earnings per share history for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
