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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. 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, Greenply Industries Limited (NSE:GREENPLY) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Greenply Industries
What Is Greenply Industries's Debt?
As you can see below, Greenply Industries had ₹7.25b of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had ₹389.7m in cash, and so its net debt is ₹6.86b.
How Healthy Is Greenply Industries's Balance Sheet?
According to the last reported balance sheet, Greenply Industries had liabilities of ₹4.57b due within 12 months, and liabilities of -₹5.5b due beyond 12 months. Offsetting these obligations, it had cash of ₹389.7m as well as receivables valued at ₹3.13b due within 12 months. So its liabilities exceed the combination of its cash and short-term receivables by a very significant -₹4.4b.
It's good to see that Greenply Industries has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.