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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Fiem Industries Limited (NSE:FIEMIND) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Fiem Industries
What Is Fiem Industries's Net Debt?
As you can see below, Fiem Industries had ₹1.31b of debt at March 2019, down from ₹1.59b a year prior. However, because it has a cash reserve of ₹213.6m, its net debt is less, at about ₹1.10b.
How Strong Is Fiem Industries's Balance Sheet?
The latest balance sheet data shows that Fiem Industries had liabilities of ₹3.34b due within a year, and liabilities of ₹1.52b falling due after that. On the other hand, it had cash of ₹213.6m and ₹1.47b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.17b.
This deficit is considerable relative to its market capitalization of ₹5.01b, so it does suggest shareholders should keep an eye on Fiem Industries's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Looking at its net debt to EBITDA of 0.72 and interest cover of 4.9 times, it seems to us that Fiem Industries is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. One way Fiem Industries could vanquish its debt would be if it stops borrowing more but conitinues to grow EBIT at around 14%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fiem Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.