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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.' 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. As with many other companies McNally Bharat Engineering Company Limited (NSE:MBECL) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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 McNally Bharat Engineering
How Much Debt Does McNally Bharat Engineering Carry?
You can click the graphic below for the historical numbers, but it shows that McNally Bharat Engineering had ₹22.6b of debt in March 2019, down from ₹35.1b, one year before. However, it also had ₹4.38b in cash, and so its net debt is ₹18.3b.
How Healthy Is McNally Bharat Engineering's Balance Sheet?
According to the last reported balance sheet, McNally Bharat Engineering had liabilities of ₹33.0b due within 12 months, and liabilities of ₹1.73b due beyond 12 months. On the other hand, it had cash of ₹4.38b and ₹21.0b worth of receivables due within a year. So its liabilities total ₹9.38b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the ₹667.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, McNally Bharat Engineering would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since McNally Bharat Engineering will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.