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 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 Shakti Pumps (India) Limited (NSE:SHAKTIPUMP) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 Shakti Pumps (India)

How Much Debt Does Shakti Pumps (India) Carry?

As you can see below, at the end of March 2019, Shakti Pumps (India) had ₹1.70b of debt, up from ₹1.06b a year ago. Click the image for more detail. On the flip side, it has ₹256.0m in cash leading to net debt of about ₹1.44b.

A Look At Shakti Pumps (India)'s Liabilities

We can see from the most recent balance sheet that Shakti Pumps (India) had liabilities of ₹2.55b falling due within a year, and liabilities of ₹376.8m due beyond that. Offsetting these obligations, it had cash of ₹256.0m as well as receivables valued at ₹1.81b due within 12 months. So its liabilities total ₹863.0m more than the combination of its cash and short-term receivables.

Since publicly traded Shakti Pumps (India) shares are worth a total of ₹5.17b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.