Does Arshiya (NSE:ARSHIYA) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Arshiya Limited (NSE:ARSHIYA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Arshiya

What Is Arshiya's Net Debt?

The image below, which you can click on for greater detail, shows that Arshiya had debt of ₹12.3b at the end of March 2020, a reduction from ₹18.2b over a year. However, because it has a cash reserve of ₹768.4m, its net debt is less, at about ₹11.5b.

How Strong Is Arshiya's Balance Sheet?

According to the last reported balance sheet, Arshiya had liabilities of ₹17.1b due within 12 months, and liabilities of ₹12.6b due beyond 12 months. Offsetting these obligations, it had cash of ₹768.4m as well as receivables valued at ₹303.8m due within 12 months. So its liabilities total ₹28.6b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹2.75b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Arshiya would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Arshiya 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.

Over 12 months, Arshiya saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Arshiya had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹356.0m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹4.6b in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Arshiya that 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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