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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Subros Limited (NSE:SUBROS) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Subros
What Is Subros's Debt?
You can click the graphic below for the historical numbers, but it shows that Subros had ₹2.44b of debt in March 2019, down from ₹3.85b, one year before. However, because it has a cash reserve of ₹870.3m, its net debt is less, at about ₹1.57b.
A Look At Subros's Liabilities
Zooming in on the latest balance sheet data, we can see that Subros had liabilities of ₹6.35b due within 12 months and liabilities of ₹650.4m due beyond that. Offsetting this, it had ₹870.3m in cash and ₹2.02b in receivables that were due within 12 months. So its liabilities total ₹4.12b more than the combination of its cash and short-term receivables.
Subros has a market capitalization of ₹13.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
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.
While Subros's low debt to EBITDA ratio of 0.77 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 6.4 last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Also good is that Subros grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Subros's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.