Is Simplex Infrastructures (NSE:SIMPLEXINF) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Simplex Infrastructures Limited (NSE:SIMPLEXINF) does carry debt. But is this debt a concern to shareholders?

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. 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. 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.

See our latest analysis for Simplex Infrastructures

What Is Simplex Infrastructures's Net Debt?

As you can see below, Simplex Infrastructures had ₹35.7b of debt, at March 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₹7.95b in cash, and so its net debt is ₹27.7b.

How Healthy Is Simplex Infrastructures's Balance Sheet?

We can see from the most recent balance sheet that Simplex Infrastructures had liabilities of ₹72.8b falling due within a year, and liabilities of ₹2.56b due beyond that. On the other hand, it had cash of ₹7.95b and ₹17.6b worth of receivables due within a year. So it has liabilities totalling ₹49.9b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹1.69b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Simplex Infrastructures would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Simplex Infrastructures 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.

In the last year Simplex Infrastructures had a loss before interest and tax, and actually shrunk its revenue by 34%, to ₹40b. To be frank that doesn't bode well.

Caveat Emptor

While Simplex Infrastructures'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 ₹326m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated ₹517m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Simplex Infrastructures (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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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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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