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. We can see that TCNS Clothing Co. Limited (NSE:TCNSBRANDS) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for TCNS Clothing
What Is TCNS Clothing's Net Debt?
As you can see below, TCNS Clothing had ₹2.18m of debt at March 2019, down from ₹2.70m a year prior. But it also has ₹215.6m in cash to offset that, meaning it has ₹213.5m net cash.
How Strong Is TCNS Clothing's Balance Sheet?
According to the last reported balance sheet, TCNS Clothing had liabilities of ₹1.53b due within 12 months, and liabilities of ₹144.1m due beyond 12 months. Offsetting these obligations, it had cash of ₹215.6m as well as receivables valued at ₹1.91b due within 12 months. So it actually has ₹452.9m more liquid assets than total liabilities.
Having regard to TCNS Clothing's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹45.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, TCNS Clothing boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that TCNS Clothing has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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 TCNS Clothing's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.