Does Pricol (NSE:PRICOLLTD) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Pricol Limited (NSE:PRICOLLTD) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Pricol

What Is Pricol's Debt?

As you can see below, at the end of March 2020, Pricol had ₹4.31b of debt, up from ₹2.79b a year ago. Click the image for more detail. However, it also had ₹380.9m in cash, and so its net debt is ₹3.93b.

How Strong Is Pricol's Balance Sheet?

The latest balance sheet data shows that Pricol had liabilities of ₹6.03b due within a year, and liabilities of ₹3.30b falling due after that. On the other hand, it had cash of ₹380.9m and ₹2.12b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹6.83b.

Given this deficit is actually higher than the company's market capitalization of ₹4.79b, we think shareholders really should watch Pricol's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Pricol will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Pricol had a loss before interest and tax, and actually shrunk its revenue by 3.4%, to ₹13b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Pricol produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₹51m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₹638m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Pricol (1 doesn't sit too well with us) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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