Is Innovative Tyres & Tubes (NSE:INNOVATIVE) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Innovative Tyres & Tubes Limited (NSE:INNOVATIVE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 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 Debt?

You can click the graphic below for the historical numbers, but it shows that Innovative Tyres & Tubes had ₹196.9m of debt in March 2021, down from ₹215.9m, one year before. However, it does have ₹40.8m in cash offsetting this, leading to net debt of about ₹156.1m.

How Healthy Is Innovative Tyres & Tubes' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Innovative Tyres & Tubes had liabilities of ₹525.4m due within 12 months and liabilities of ₹412.7m due beyond that. Offsetting these obligations, it had cash of ₹40.8m as well as receivables valued at ₹165.4m due within 12 months. So its liabilities total ₹731.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹277.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Innovative Tyres & Tubes would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Innovative Tyres & Tubes's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Innovative Tyres & Tubes had a loss before interest and tax, and actually shrunk its revenue by 6.5%, to ₹1.4b. That's not what we would hope to see.

Caveat Emptor

Importantly, Innovative Tyres & Tubes had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹63m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost ₹88m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. For instance, we've identified 3 warning signs for Innovative Tyres & Tubes (2 are potentially serious) 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. 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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