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. We note that Mittal Life Style Limited (NSE:MITTAL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Mittal Life Style
What Is Mittal Life Style's Debt?
You can click the graphic below for the historical numbers, but it shows that Mittal Life Style had ₹56.5m of debt in March 2019, down from ₹94.1m, one year before. On the flip side, it has ₹6.10m in cash leading to net debt of about ₹50.4m.
A Look At Mittal Life Style's Liabilities
We can see from the most recent balance sheet that Mittal Life Style had liabilities of ₹84.1m falling due within a year, and liabilities of ₹37.5m due beyond that. Offsetting this, it had ₹6.10m in cash and ₹209.4m in receivables that were due within 12 months. So it can boast ₹93.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Mittal Life Style could probably pay off its debt with ease, as its balance sheet is far from stretched.
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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Mittal Life Style has net debt worth 1.7 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 4.2 times the interest expense. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Sadly, Mittal Life Style's EBIT actually dropped 9.0% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. There's no doubt that we learn most about debt from the balance sheet. But it is Mittal Life Style's earnings that will influence how the balance sheet holds up in the future. 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.