Warren Buffett famously said, ‘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 TTK Prestige Limited (NSE:TTKPRESTIG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
What Is TTK Prestige’s Debt?
You can click the graphic below for the historical numbers, but it shows that TTK Prestige had ₹904.8m of debt in March 2019, down from ₹1.29b, one year before. But on the other hand it also has ₹2.44b in cash, leading to a ₹1.54b net cash position.
How Strong Is TTK Prestige’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that TTK Prestige had liabilities of ₹3.84b due within 12 months and liabilities of ₹1.02b due beyond that. Offsetting this, it had ₹2.44b in cash and ₹3.34b in receivables that were due within 12 months. So it actually has ₹924.4m more liquid assets than total liabilities.
This state of affairs indicates that TTK Prestige’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the ₹82.2b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Simply put, the fact that TTK Prestige has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that TTK Prestige grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TTK Prestige’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TTK Prestige may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, TTK Prestige recorded free cash flow of 31% of its EBIT, which is weaker than we’d expect. That’s not great, when it comes to paying down debt.
While it is always sensible to investigate a company’s debt, in this case TTK Prestige has ₹1.54b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 15% in the last twelve months. So we don’t have any problem with TTK Prestige’s use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you’ve also come to that realization, you’re in luck, because today you can view this interactive graph of TTK Prestige’s earnings per share history for free.
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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