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.’ 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. As with many other companies Nagreeka Exports Limited (NSE:NAGREEKEXP) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Nagreeka Exports
How Much Debt Does Nagreeka Exports Carry?
The image below, which you can click on for greater detail, shows that Nagreeka Exports had debt of ₹1.91b at the end of March 2022, a reduction from ₹2.10b over a year. Net debt is about the same, since the it doesn’t have much cash.
How Strong Is Nagreeka Exports’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Nagreeka Exports had liabilities of ₹1.75b due within 12 months and liabilities of ₹614.2m due beyond that. Offsetting this, it had ₹29.7m in cash and ₹203.5m in receivables that were due within 12 months. So it has liabilities totalling ₹2.14b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₹455.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Nagreeka Exports would likely require a major re-capitalisation if it had to pay its creditors today.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Weak interest cover of 1.5 times and a disturbingly high net debt to EBITDA ratio of 6.7 hit our confidence in Nagreeka Exports like a one-two punch to the gut. The debt burden here is substantial. However, it should be some comfort for shareholders to recall that Nagreeka Exports actually grew its EBIT by a hefty 52,424%, over the last 12 months. If that earnings trend continues it will make its debt load much more manageable in the future. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Nagreeka Exports will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Nagreeka Exports recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
On the face of it, Nagreeka Exports’s net debt to EBITDA left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it’s pretty decent at growing its EBIT; that’s encouraging. Overall, we think it’s fair to say that Nagreeka Exports has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example – Nagreeka Exports has 3 warning signs we think you should be aware of.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.