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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. We can see that Pritish Nandy Communications Ltd (NSE:PNC) does use debt in its business. But is this debt a concern to shareholders?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Pritish Nandy Communications
What Is Pritish Nandy Communications's Debt?
The chart below, which you can click on for greater detail, shows that Pritish Nandy Communications had ₹42.2m in debt in March 2019; about the same as the year before. However, its balance sheet shows it holds ₹75.4m in cash, so it actually has ₹33.2m net cash.
A Look At Pritish Nandy Communications's Liabilities
Zooming in on the latest balance sheet data, we can see that Pritish Nandy Communications had liabilities of ₹86.7m due within 12 months and liabilities of ₹141.1m due beyond that. Offsetting these obligations, it had cash of ₹75.4m as well as receivables valued at ₹42.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹110.5m.
This deficit isn't so bad because Pritish Nandy Communications is worth ₹208.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Pritish Nandy Communications also has more cash than debt, so we're pretty confident it can manage its debt safely.
Importantly, Pritish Nandy Communications's EBIT fell a jaw-dropping 85% 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 Pritish Nandy Communications will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.