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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shreyans Industries Limited (NSE:SHREYANIND) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Shreyans Industries
What Is Shreyans Industries's Debt?
The image below, which you can click on for greater detail, shows that Shreyans Industries had debt of ₹315.7m at the end of March 2019, a reduction from ₹461.9m over a year. But on the other hand it also has ₹431.8m in cash, leading to a ₹116.1m net cash position.
How Healthy Is Shreyans Industries's Balance Sheet?
The latest balance sheet data shows that Shreyans Industries had liabilities of ₹929.6m due within a year, and liabilities of ₹533.2m falling due after that. Offsetting these obligations, it had cash of ₹431.8m as well as receivables valued at ₹416.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹614.9m.
While this might seem like a lot, it is not so bad since Shreyans Industries has a market capitalization of ₹1.68b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Shreyans Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Shreyans Industries has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shreyans Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.