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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, HEC Infra Projects Limited (NSE:HECPROJECT) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for HEC Infra Projects
What Is HEC Infra Projects's Net Debt?
As you can see below, at the end of March 2019, HEC Infra Projects had ₹286.1m of debt, up from ₹260.4m a year ago. Click the image for more detail. However, it does have ₹44.5m in cash offsetting this, leading to net debt of about ₹241.6m.
How Strong Is HEC Infra Projects's Balance Sheet?
We can see from the most recent balance sheet that HEC Infra Projects had liabilities of ₹504.1m falling due within a year, and liabilities of ₹128.1m due beyond that. On the other hand, it had cash of ₹44.5m and ₹308.6m worth of receivables due within a year. So it has liabilities totalling ₹279.2m more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of ₹252.3m, we think shareholders really should watch HEC Infra Projects's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.
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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.