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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies KNR Constructions Limited (NSE:KNRCON) makes use of debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for KNR Constructions
What Is KNR Constructions's Debt?
You can click the graphic below for the historical numbers, but it shows that KNR Constructions had ₹7.07b of debt in March 2019, down from ₹7.70b, one year before. However, it does have ₹2.21b in cash offsetting this, leading to net debt of about ₹4.86b.
How Healthy Is KNR Constructions's Balance Sheet?
According to the last reported balance sheet, KNR Constructions had liabilities of ₹6.42b due within 12 months, and liabilities of ₹7.33b due beyond 12 months. Offsetting this, it had ₹2.21b in cash and ₹1.14b in receivables that were due within 12 months. So it has liabilities totalling ₹10.4b more than its cash and near-term receivables, combined.
KNR Constructions has a market capitalization of ₹33.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Looking at its net debt to EBITDA of 0.97 and interest cover of 3.4 times, it seems to us that KNR Constructions is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. One way KNR Constructions could vanquish its debt would be if it stops borrowing more but conitinues to grow EBIT at around 20%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if KNR Constructions can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.