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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 BPL Limited (NSE:BPL) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 BPL
How Much Debt Does BPL Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 BPL had ₹93.1m of debt, an increase on ₹62.8m, over one year. However, its balance sheet shows it holds ₹1.15b in cash, so it actually has ₹1.06b net cash.
A Look At BPL's Liabilities
According to the last reported balance sheet, BPL had liabilities of ₹301.2m due within 12 months, and liabilities of ₹1.71b due beyond 12 months. On the other hand, it had cash of ₹1.15b and ₹1.31b worth of receivables due within a year. So it can boast ₹444.0m more liquid assets than total liabilities.
This surplus liquidity suggests that BPL's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, BPL boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly, BPL's EBIT fell a jaw-dropping 83% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 BPL will need earnings to service that debt. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While BPL has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, BPL burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.