Is Ashiana Housing (NSE:ASHIANA) Using Too Much Debt?

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.' 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 Ashiana Housing Limited (NSE:ASHIANA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ashiana Housing

How Much Debt Does Ashiana Housing Carry?

The image below, which you can click on for greater detail, shows that Ashiana Housing had debt of ₹514.9m at the end of June 2020, a reduction from ₹1.11b over a year. But it also has ₹1.86b in cash to offset that, meaning it has ₹1.35b net cash.

A Look At Ashiana Housing's Liabilities

According to the last reported balance sheet, Ashiana Housing had liabilities of ₹2.95b due within 12 months, and liabilities of ₹1.02b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.86b as well as receivables valued at ₹336.0m due within 12 months. So it has liabilities totalling ₹1.8b more than its cash and near-term receivables, combined.

Ashiana Housing has a market capitalization of ₹7.57b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Ashiana Housing boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ashiana Housing 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 Ashiana Housing wasn't profitable at an EBIT level, but managed to grow its revenue by 5.6%, to ₹2.7b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Ashiana Housing?

Although Ashiana Housing had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹224m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 Ashiana Housing (at least 1 which is significant) , 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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