Does Morarjee Textiles (NSE:MORARJEE) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 Morarjee Textiles Limited (NSE:MORARJEE) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Morarjee Textiles

What Is Morarjee Textiles's Debt?

You can click the graphic below for the historical numbers, but it shows that Morarjee Textiles had ₹4.41b of debt in September 2020, down from ₹5.00b, one year before. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Morarjee Textiles's Balance Sheet?

According to the last reported balance sheet, Morarjee Textiles had liabilities of ₹3.94b due within 12 months, and liabilities of ₹2.53b due beyond 12 months. On the other hand, it had cash of ₹35.8m and ₹301.3m worth of receivables due within a year. So its liabilities total ₹6.13b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹363.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Morarjee Textiles 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 Morarjee Textiles 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.

In the last year Morarjee Textiles had a loss before interest and tax, and actually shrunk its revenue by 33%, to ₹2.5b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Morarjee Textiles's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹213m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. 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 ₹521m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Morarjee Textiles , and understanding them should be part of your investment process.

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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