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Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Time Technoplast Limited (NSE:TIMETECHNO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Time Technoplast
What Is Time Technoplast's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Time Technoplast had debt of ₹8.41b, up from ₹7.77b in one year. However, it also had ₹666.4m in cash, and so its net debt is ₹7.74b.
How Healthy Is Time Technoplast's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Time Technoplast had liabilities of ₹10.9b due within 12 months and liabilities of ₹3.91b due beyond that. Offsetting these obligations, it had cash of ₹666.4m as well as receivables valued at ₹8.52b due within 12 months. So it has liabilities totalling ₹5.66b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Time Technoplast is worth ₹15.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
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.
Looking at its net debt to EBITDA of 1.5 and interest cover of 3.7 times, it seems to us that Time Technoplast is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. One way Time Technoplast could vanquish its debt would be if it stops borrowing more but conitinues to grow EBIT at around 10%, as it did over the last year. 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 Time Technoplast's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.