Is Kothari Products (NSE:KOTHARIPRO) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Kothari Products Limited (NSE:KOTHARIPRO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kothari Products

What Is Kothari Products's Net Debt?

The chart below, which you can click on for greater detail, shows that Kothari Products had ₹11.0b in debt in March 2020; about the same as the year before. On the flip side, it has ₹2.43b in cash leading to net debt of about ₹8.62b.

How Healthy Is Kothari Products's Balance Sheet?

The latest balance sheet data shows that Kothari Products had liabilities of ₹11.3b due within a year, and liabilities of ₹5.03b falling due after that. On the other hand, it had cash of ₹2.43b and ₹21.2b worth of receivables due within a year. So it can boast ₹7.27b more liquid assets than total liabilities.

This surplus liquidity suggests that Kothari Products's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kothari Products's earnings that will influence how the balance sheet holds up in the future. 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 Kothari Products had a loss before interest and tax, and actually shrunk its revenue by 29%, to ₹41b. That makes us nervous, to say the least.

Caveat Emptor

While Kothari Products's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹645.5m. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. For instance, we've identified 5 warning signs for Kothari Products (2 are concerning) 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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