Is Maral Overseas (NSE:MARALOVER) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Maral Overseas

What Is Maral Overseas's Net Debt?

As you can see below, Maral Overseas had ₹1.78b of debt at September 2020, down from ₹1.97b a year prior. However, it does have ₹175.7m in cash offsetting this, leading to net debt of about ₹1.60b.

A Look At Maral Overseas's Liabilities

According to the last reported balance sheet, Maral Overseas had liabilities of ₹2.64b due within 12 months, and liabilities of ₹657.1m due beyond 12 months. Offsetting these obligations, it had cash of ₹175.7m as well as receivables valued at ₹821.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.30b.

This deficit casts a shadow over the ₹581.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Maral Overseas would probably need a major re-capitalization if its creditors were to demand repayment. 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 Maral Overseas 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 Maral Overseas had a loss before interest and tax, and actually shrunk its revenue by 27%, to ₹5.4b. That makes us nervous, to say the least.

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 ₹232m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹254m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. For example, we've discovered 3 warning signs for Maral Overseas that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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