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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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 Shriram Pistons & Rings Limited (NSE:SHRIPISTON) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Shriram Pistons & Rings
What Is Shriram Pistons & Rings's Debt?
You can click the graphic below for the historical numbers, but it shows that Shriram Pistons & Rings had ₹1.25b of debt in March 2019, down from ₹1.79b, one year before. However, because it has a cash reserve of ₹849.4m, its net debt is less, at about ₹404.9m.
How Healthy Is Shriram Pistons & Rings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shriram Pistons & Rings had liabilities of ₹4.01b due within 12 months and liabilities of ₹1.41b due beyond that. On the other hand, it had cash of ₹849.4m and ₹3.63b worth of receivables due within a year. So its liabilities total ₹940.9m more than the combination of its cash and short-term receivables.
Of course, Shriram Pistons & Rings has a market capitalization of ₹17.9b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.