Innovative Tyres & Tubes (NSE:INNOVATIVE) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Innovative Tyres & Tubes Limited (NSE:INNOVATIVE) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Innovative Tyres & Tubes

What Is Innovative Tyres & Tubes's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Innovative Tyres & Tubes had debt of ₹359.7m, up from ₹249.8m in one year. However, it does have ₹17.9m in cash offsetting this, leading to net debt of about ₹341.8m.

How Healthy Is Innovative Tyres & Tubes' Balance Sheet?

We can see from the most recent balance sheet that Innovative Tyres & Tubes had liabilities of ₹509.9m falling due within a year, and liabilities of ₹471.5m due beyond that. Offsetting these obligations, it had cash of ₹17.9m as well as receivables valued at ₹92.9m due within 12 months. So its liabilities total ₹870.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹188.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Innovative Tyres & Tubes would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Innovative Tyres & Tubes will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Innovative Tyres & Tubes made a loss at the EBIT level, and saw its revenue drop to ₹1.2b, which is a fall of 8.7%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Innovative Tyres & Tubes produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₹142m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₹80m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. Case in point: We've spotted 4 warning signs for Innovative Tyres & Tubes you should be aware of, and 3 of them are significant.

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.

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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