Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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 Bhagyanagar Properties Limited (NSE:BHAGYAPROP) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Bhagyanagar Properties
How Much Debt Does Bhagyanagar Properties Carry?
As you can see below, at the end of March 2019, Bhagyanagar Properties had ₹59.7m of debt, up from ₹43.0m a year ago. Click the image for more detail. However, it does have ₹50.7m in cash offsetting this, leading to net debt of about ₹9.04m.
How Healthy Is Bhagyanagar Properties's Balance Sheet?
According to the last reported balance sheet, Bhagyanagar Properties had liabilities of ₹46.2m due within 12 months, and liabilities of ₹78.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹50.7m as well as receivables valued at ₹4.60m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹69.4m.
Since publicly traded Bhagyanagar Properties shares are worth a total of ₹671.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Bhagyanagar Properties has a very light debt load indeed.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.