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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.' 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 Banco Products (India) Limited (NSE:BANCOINDIA) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Banco Products (India)
What Is Banco Products (India)'s Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Banco Products (India) had debt of ₹394.6m, up from ₹336.1m in one year. However, it does have ₹1.81b in cash offsetting this, leading to net cash of ₹1.42b.
How Healthy Is Banco Products (India)'s Balance Sheet?
According to the last reported balance sheet, Banco Products (India) had liabilities of ₹3.10b due within 12 months, and liabilities of ₹665.9m due beyond 12 months. Offsetting this, it had ₹1.81b in cash and ₹2.82b in receivables that were due within 12 months. So it actually has ₹860.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Banco Products (India) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Banco Products (India) boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Banco Products (India) if management cannot prevent a repeat of the 23% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Banco Products (India) 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.