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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Birla Cable Limited (NSE:BIRLACABLE) makes use of debt. But is this debt a concern to shareholders?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Birla Cable
How Much Debt Does Birla Cable Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Birla Cable had debt of ₹593.5m, up from ₹446.0m in one year. Net debt is about the same, since the it doesn't have much cash.
A Look At Birla Cable's Liabilities
According to the last reported balance sheet, Birla Cable had liabilities of ₹1.49b due within 12 months, and liabilities of ₹195.6m due beyond 12 months. Offsetting this, it had ₹5.00m in cash and ₹1.64b in receivables that were due within 12 months. So its liabilities total ₹45.8m more than the combination of its cash and short-term receivables.
Of course, Birla Cable has a market capitalization of ₹1.51b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.
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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Birla Cable has a low net debt to EBITDA ratio of only 0.89. And its EBIT easily covers its interest expense, being 22.4 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also positive, Birla Cable grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Birla Cable can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.