Health Check: How Prudently Does Ashapura Minechem (NSE:ASHAPURMIN) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ashapura Minechem Limited (NSE:ASHAPURMIN) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ashapura Minechem

What Is Ashapura Minechem's Net Debt?

As you can see below, at the end of March 2020, Ashapura Minechem had ₹4.30b of debt, up from ₹2.00b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹674.0m, its net debt is less, at about ₹3.63b.

How Strong Is Ashapura Minechem's Balance Sheet?

We can see from the most recent balance sheet that Ashapura Minechem had liabilities of ₹7.51b falling due within a year, and liabilities of ₹7.23b due beyond that. Offsetting these obligations, it had cash of ₹674.0m as well as receivables valued at ₹3.30b due within 12 months. So its liabilities total ₹10.8b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹4.59b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Ashapura Minechem would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ashapura Minechem 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.

Over 12 months, Ashapura Minechem made a loss at the EBIT level, and saw its revenue drop to ₹5.1b, which is a fall of 4.5%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Ashapura Minechem produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹405.7m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₹388.6m over the last twelve months. That means it's on the risky side of things. 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. Case in point: We've spotted 4 warning signs for Ashapura Minechem you should be aware of, and 1 of them doesn't sit too well with us.

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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