Is Maral Overseas (NSE:MARALOVER) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Maral Overseas Limited (NSE:MARALOVER) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Maral Overseas

What Is Maral Overseas's Debt?

As you can see below, Maral Overseas had ₹2.00b of debt at March 2020, down from ₹2.60b a year prior. However, it also had ₹185.7m in cash, and so its net debt is ₹1.81b.

How Strong Is Maral Overseas's Balance Sheet?

According to the last reported balance sheet, Maral Overseas had liabilities of ₹2.86b due within 12 months, and liabilities of ₹632.6m due beyond 12 months. Offsetting these obligations, it had cash of ₹185.7m as well as receivables valued at ₹757.9m due within 12 months. So it has liabilities totalling ₹2.55b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹601.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Maral Overseas would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Maral Overseas'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 Maral Overseas had negative earnings before interest and tax, and actually shrunk its revenue by 11%, to ₹6.8b. That's not what we would hope to see.

Caveat Emptor

While Maral Overseas'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 a very considerable ₹169m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹153m in the last year. So we think this stock is quite risky, like eating chicken you think might look too pink. We'd prefer pass. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Maral Overseas has 4 warning signs (and 2 which can't be ignored) we think you should know about.

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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