B.L. Kashyap and Sons (NSE:BLKASHYAP) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, B.L. Kashyap and Sons Limited (NSE:BLKASHYAP) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for B.L. Kashyap and Sons

What Is B.L. Kashyap and Sons's Net Debt?

The chart below, which you can click on for greater detail, shows that B.L. Kashyap and Sons had ₹4.28b in debt in March 2020; about the same as the year before. However, it does have ₹126.9m in cash offsetting this, leading to net debt of about ₹4.16b.

A Look At B.L. Kashyap and Sons's Liabilities

According to the last reported balance sheet, B.L. Kashyap and Sons had liabilities of ₹9.76b due within 12 months, and liabilities of ₹3.84b due beyond 12 months. Offsetting these obligations, it had cash of ₹126.9m as well as receivables valued at ₹5.76b due within 12 months. So its liabilities total ₹7.7b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹1.63b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, B.L. Kashyap and Sons would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.077 times and a disturbingly high net debt to EBITDA ratio of 24.5 hit our confidence in B.L. Kashyap and Sons like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, B.L. Kashyap and Sons's EBIT was down 82% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since B.L. Kashyap and Sons 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 last three years, B.L. Kashyap and Sons actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

On the face of it, B.L. Kashyap and Sons's EBIT growth rate 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 converting EBIT to free cash flow; that's encouraging. After considering the datapoints discussed, we think B.L. Kashyap and Sons has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that B.L. Kashyap and Sons is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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