Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, PPAP Automotive Limited (NSE:PPAP) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for PPAP Automotive
What Is PPAP Automotive's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 PPAP Automotive had debt of ₹424.4m, up from ₹225.0m in one year. On the flip side, it has ₹8.74m in cash leading to net debt of about ₹415.7m.
How Healthy Is PPAP Automotive's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that PPAP Automotive had liabilities of ₹922.6m due within 12 months and liabilities of ₹329.2m due beyond that. On the other hand, it had cash of ₹8.74m and ₹527.5m worth of receivables due within a year. So its liabilities total ₹715.6m more than the combination of its cash and short-term receivables.
Given PPAP Automotive has a market capitalization of ₹3.68b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is PPAP Automotive'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 PPAP Automotive had a loss before interest and tax, and actually shrunk its revenue by 23%, to ₹2.8b. That makes us nervous, to say the least.
Caveat Emptor
Not only did PPAP Automotive's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹10m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹176m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for PPAP Automotive (1 shouldn't be ignored!) that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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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About NSEI:PPAP
PPAP Automotive
Manufactures and sells automotive sealing systems, and interior and exterior automotive parts in India and internationally.
Moderate and slightly overvalued.
