Would Sundaram Multi Pap (NSE:SUNDARAM) Be Better Off With Less Debt?

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. As with many other companies Sundaram Multi Pap Limited (NSE:SUNDARAM) makes use of debt. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sundaram Multi Pap

What Is Sundaram Multi Pap's Debt?

As you can see below, Sundaram Multi Pap had ₹468.8m of debt, at March 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of ₹174.1m, its net debt is less, at about ₹294.7m.

How Strong Is Sundaram Multi Pap's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sundaram Multi Pap had liabilities of ₹353.4m due within 12 months and liabilities of ₹230.1m due beyond that. Offsetting this, it had ₹174.1m in cash and ₹170.7m in receivables that were due within 12 months. So it has liabilities totalling ₹238.7m more than its cash and near-term receivables, combined.

Sundaram Multi Pap has a market capitalization of ₹587.6m, 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 Sundaram Multi Pap'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 Sundaram Multi Pap had a loss before interest and tax, and actually shrunk its revenue by 30%, to ₹717m. That makes us nervous, to say the least.

Caveat Emptor

While Sundaram Multi Pap'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 ₹20.8m. 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. For example, we would not want to see a repeat of last year's loss of ₹51.7m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Sundaram Multi Pap (2 are concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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