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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Bombay Rayon Fashions Limited (NSE:BRFL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Bombay Rayon Fashions
What Is Bombay Rayon Fashions's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Bombay Rayon Fashions had ₹44.1b of debt, an increase on ₹40.5b, over one year. Net debt is about the same, since the it doesn't have much cash.
A Look At Bombay Rayon Fashions's Liabilities
We can see from the most recent balance sheet that Bombay Rayon Fashions had liabilities of ₹41.7b falling due within a year, and liabilities of ₹11.2b due beyond that. Offsetting this, it had ₹302.2m in cash and ₹14.5b in receivables that were due within 12 months. So its liabilities total ₹38.1b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the ₹1.77b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Bombay Rayon Fashions would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bombay Rayon Fashions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.