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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Shivam Autotech Limited (NSE:SHIVAMAUTO) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Shivam Autotech
How Much Debt Does Shivam Autotech Carry?
As you can see below, Shivam Autotech had ₹3.64b of debt, at September 2018, which is about the same the year before. You can click the chart for greater detail. However, it does have ₹84.8m in cash offsetting this, leading to net debt of about ₹3.55b.
A Look At Shivam Autotech's Liabilities
Zooming in on the latest balance sheet data, we can see that Shivam Autotech had liabilities of ₹3.35b due within 12 months and liabilities of ₹1.97b due beyond that. Offsetting this, it had ₹84.8m in cash and ₹1.02b in receivables that were due within 12 months. So its liabilities total ₹4.21b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the ₹1.98b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Shivam Autotech would likely require a major re-capitalisation if it had to pay its creditors today.
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).
While Shivam Autotech's debt to EBITDA ratio (4.9) suggests that it uses some debt, its interest cover is very weak, at 0.56, suggesting high leverage. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Even worse, Shivam Autotech saw its EBIT tank 28% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. 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 Shivam Autotech 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.