Is Peninsula Land (NSE:PENINLAND) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Peninsula Land Limited (NSE:PENINLAND) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Peninsula Land

How Much Debt Does Peninsula Land Carry?

The image below, which you can click on for greater detail, shows that Peninsula Land had debt of ₹5.62b at the end of March 2020, a reduction from ₹22.4b over a year. However, it does have ₹1.55b in cash offsetting this, leading to net debt of about ₹4.07b.

A Look At Peninsula Land's Liabilities

We can see from the most recent balance sheet that Peninsula Land had liabilities of ₹35.8b falling due within a year, and liabilities of ₹4.64b due beyond that. Offsetting this, it had ₹1.55b in cash and ₹203.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹38.7b.

This deficit casts a shadow over the ₹1.35b 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, Peninsula Land would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Peninsula Land 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 Peninsula Land wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to ₹4.8b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Peninsula Land still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₹3.8b. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹4.5b in the last year. So we think buying this stock is 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. Be aware that Peninsula Land is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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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