Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Atul Auto Limited (NSE:ATULAUTO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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. 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.
See our latest analysis for Atul Auto
What Is Atul Auto's Debt?
As you can see below, at the end of March 2021, Atul Auto had ₹156.9m of debt, up from ₹7.40m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹195.8m in cash, so it actually has ₹38.9m net cash.
A Look At Atul Auto's Liabilities
Zooming in on the latest balance sheet data, we can see that Atul Auto had liabilities of ₹716.5m due within 12 months and liabilities of ₹160.6m due beyond that. Offsetting these obligations, it had cash of ₹195.8m as well as receivables valued at ₹252.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹428.9m.
Since publicly traded Atul Auto shares are worth a total of ₹4.81b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Atul Auto boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Atul Auto'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 Atul Auto had a loss before interest and tax, and actually shrunk its revenue by 41%, to ₹3.0b. To be frank that doesn't bode well.
So How Risky Is Atul Auto?
While Atul Auto lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₹7.8m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Atul Auto (1 shouldn't be ignored) 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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About NSEI:ATULAUTO
Proven track record with adequate balance sheet.
