In This Article:
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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. Importantly, BSL Limited (NSE:BSL) does carry debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
View our latest analysis for BSL
What Is BSL's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 BSL had ₹1.72b of debt, an increase on ₹1.54b, over one year. And it doesn't have much cash, so its net debt is about the same.
A Look At BSL's Liabilities
According to the last reported balance sheet, BSL had liabilities of ₹2.09b due within 12 months, and liabilities of ₹416.4m due beyond 12 months. On the other hand, it had cash of ₹3.68m and ₹1.01b worth of receivables due within a year. So its liabilities total ₹1.49b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the ₹281.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, BSL would probably need a major re-capitalization if its creditors were to demand repayment.
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.
Weak interest cover of 0.86 times and a disturbingly high net debt to EBITDA ratio of 5.9 hit our confidence in BSL like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Investors should also be troubled by the fact that BSL saw its EBIT drop by 12% over the last twelve months. If that's the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since BSL 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.