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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, Maharashtra Seamless Limited (NSE:MAHSEAMLES) does carry debt. But is this debt a concern to shareholders?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Maharashtra Seamless
What Is Maharashtra Seamless's Net Debt?
As you can see below, at the end of March 2019, Maharashtra Seamless had ₹10.6b of debt, up from ₹6.26b a year ago. Click the image for more detail. On the flip side, it has ₹6.44b in cash leading to net debt of about ₹4.15b.
A Look At Maharashtra Seamless's Liabilities
According to the last reported balance sheet, Maharashtra Seamless had liabilities of ₹6.02b due within 12 months, and liabilities of ₹11.2b due beyond 12 months. Offsetting this, it had ₹6.44b in cash and ₹8.70b in receivables that were due within 12 months. So it has liabilities totalling ₹2.11b more than its cash and near-term receivables, combined.
Since publicly traded Maharashtra Seamless shares are worth a total of ₹25.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Maharashtra Seamless's net debt is only 0.61 times its EBITDA. And its EBIT covers its interest expense a whopping 10.9 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Maharashtra Seamless grew its EBIT by 85% over the last twelve months, and that growth will make it easier to handle its 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 Maharashtra Seamless'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.