Would Premier Explosives (NSE:PREMEXPLN) Be Better Off With Less Debt?

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 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. Importantly, Premier Explosives Limited (NSE:PREMEXPLN) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Premier Explosives

How Much Debt Does Premier Explosives Carry?

The image below, which you can click on for greater detail, shows that at March 2020 Premier Explosives had debt of ₹551.0m, up from ₹275.5m in one year. On the flip side, it has ₹158.8m in cash leading to net debt of about ₹392.2m.

How Strong Is Premier Explosives's Balance Sheet?

According to the last reported balance sheet, Premier Explosives had liabilities of ₹920.2m due within 12 months, and liabilities of ₹174.1m due beyond 12 months. On the other hand, it had cash of ₹158.8m and ₹493.1m worth of receivables due within a year. So its liabilities total ₹442.3m more than the combination of its cash and short-term receivables.

Premier Explosives has a market capitalization of ₹1.41b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Premier Explosives'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 Premier Explosives had a loss before interest and tax, and actually shrunk its revenue by 35%, to ₹1.6b. To be frank that doesn't bode well.

Caveat Emptor

While Premier Explosives's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹107.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹358.5m of cash over the last year. So suffice it to say we consider the stock very 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 Premier Explosives is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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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