Brooks Laboratories (NSE:BROOKS) Is Making Moderate Use Of Debt

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. We note that Brooks Laboratories Limited (NSE:BROOKS) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Brooks Laboratories

What Is Brooks Laboratories's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Brooks Laboratories had ₹264.2m of debt in March 2020, down from ₹283.3m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Brooks Laboratories's Balance Sheet?

According to the last reported balance sheet, Brooks Laboratories had liabilities of ₹458.0m due within 12 months, and liabilities of ₹136.5m due beyond 12 months. Offsetting this, it had ₹3.96m in cash and ₹218.7m in receivables that were due within 12 months. So it has liabilities totalling ₹371.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Brooks Laboratories is worth ₹1.34b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Brooks Laboratories's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Brooks Laboratories wasn't profitable at an EBIT level, but managed to grow its revenue by 6.8%, to ₹653m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Brooks Laboratories had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹94m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹120m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Brooks Laboratories (at least 2 which are significant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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