Is Mukta Arts (NSE:MUKTAARTS) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Mukta Arts Limited (NSE:MUKTAARTS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mukta Arts

What Is Mukta Arts's Debt?

The image below, which you can click on for greater detail, shows that Mukta Arts had debt of ₹720.6m at the end of September 2020, a reduction from ₹769.5m over a year. However, it does have ₹309.4m in cash offsetting this, leading to net debt of about ₹411.2m.

How Strong Is Mukta Arts's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mukta Arts had liabilities of ₹1.12b due within 12 months and liabilities of ₹1.27b due beyond that. On the other hand, it had cash of ₹309.4m and ₹324.4m worth of receivables due within a year. So it has liabilities totalling ₹1.76b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹635.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Mukta Arts 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 Mukta Arts 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, Mukta Arts made a loss at the EBIT level, and saw its revenue drop to ₹1.2b, which is a fall of 31%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Mukta Arts's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹78m. 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. Nevertheless, we would not bet on it given that it vaporized ₹226m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Mukta Arts you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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