Shalimar Paints (NSE:SHALPAINTS) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, '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. As with many other companies Shalimar Paints Limited (NSE:SHALPAINTS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shalimar Paints

What Is Shalimar Paints's Net Debt?

As you can see below, Shalimar Paints had ₹1.19b of debt at March 2020, down from ₹1.52b a year prior. However, it does have ₹130.4m in cash offsetting this, leading to net debt of about ₹1.06b.

A Look At Shalimar Paints's Liabilities

According to the last reported balance sheet, Shalimar Paints had liabilities of ₹2.37b due within 12 months, and liabilities of ₹266.9m due beyond 12 months. Offsetting these obligations, it had cash of ₹130.4m as well as receivables valued at ₹744.2m due within 12 months. So it has liabilities totalling ₹1.76b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Shalimar Paints has a market capitalization of ₹3.35b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shalimar Paints's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shalimar Paints wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to ₹3.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Shalimar Paints produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₹433m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹421m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Take risks, for example - Shalimar Paints has 3 warning signs (and 2 which are concerning) we think you should know about.

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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