Is Archies (NSE:ARCHIES) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Archies Limited (NSE:ARCHIES) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Archies

What Is Archies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2020 Archies had ₹283.2m of debt, an increase on ₹160.6m, over one year. However, because it has a cash reserve of ₹64.4m, its net debt is less, at about ₹218.8m.

How Healthy Is Archies's Balance Sheet?

The latest balance sheet data shows that Archies had liabilities of ₹667.9m due within a year, and liabilities of ₹515.3m falling due after that. Offsetting these obligations, it had cash of ₹64.4m as well as receivables valued at ₹165.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹953.5m.

This deficit casts a shadow over the ₹407.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Archies would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Archies 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, Archies made a loss at the EBIT level, and saw its revenue drop to ₹1.4b, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

While Archies's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹6.4m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of ₹71.8m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Archies that 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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