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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 Archies Limited (NSE:ARCHIES) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Archies
How Much Debt Does Archies Carry?
The chart below, which you can click on for greater detail, shows that Archies had ₹160.2m in debt in March 2019; about the same as the year before. On the flip side, it has ₹79.4m in cash leading to net debt of about ₹80.8m.
A Look At Archies's Liabilities
According to the last reported balance sheet, Archies had liabilities of ₹463.7m due within 12 months, and liabilities of ₹41.1m due beyond 12 months. On the other hand, it had cash of ₹79.4m and ₹242.7m worth of receivables due within a year. So it has liabilities totalling ₹182.6m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Archies has a market capitalization of ₹675.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Archies's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year Archies had negative earnings before interest and tax, and actually shrunk its revenue by 2.0%, to ₹1.6b. We would much prefer see growth.