Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Arvind SmartSpaces Limited (NSE:ARVSMART) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Arvind SmartSpaces

What Is Arvind SmartSpaces's Debt?

As you can see below, Arvind SmartSpaces had ₹1.71b of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have ₹119.0m in cash offsetting this, leading to net debt of about ₹1.59b.

A Look At Arvind SmartSpaces's Liabilities

Zooming in on the latest balance sheet data, we can see that Arvind SmartSpaces had liabilities of ₹4.30b due within 12 months and liabilities of ₹822.7m due beyond that. On the other hand, it had cash of ₹119.0m and ₹356.3m worth of receivables due within a year. So its liabilities total ₹4.65b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₹3.19b market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.