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. 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. We note that SecUR Credentials Limited (NSE:SECURCRED) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for SecUR Credentials
What Is SecUR Credentials's Debt?
As you can see below, at the end of March 2019, SecUR Credentials had ₹269.3m of debt, up from ₹39.7m a year ago. Click the image for more detail. However, it does have ₹78.8m in cash offsetting this, leading to net debt of about ₹190.5m.
How Strong Is SecUR Credentials's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SecUR Credentials had liabilities of ₹315.7m due within 12 months and liabilities of ₹130.7m due beyond that. Offsetting these obligations, it had cash of ₹78.8m as well as receivables valued at ₹394.2m due within 12 months. So it can boast ₹26.6m more liquid assets than total liabilities.
This surplus suggests that SecUR Credentials has a conservative balance sheet, and could probably eliminate its debt without much difficulty.
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).