Is PPAP Automotive (NSE:PPAP) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that PPAP Automotive Limited (NSE:PPAP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 PPAP Automotive

What Is PPAP Automotive's Debt?

As you can see below, PPAP Automotive had ₹219.5m of debt at March 2020, down from ₹245.9m a year prior. However, it does have ₹61.2m in cash offsetting this, leading to net debt of about ₹158.4m.

A Look At PPAP Automotive's Liabilities

Zooming in on the latest balance sheet data, we can see that PPAP Automotive had liabilities of ₹741.7m due within 12 months and liabilities of ₹284.8m due beyond that. Offsetting this, it had ₹61.2m in cash and ₹408.9m in receivables that were due within 12 months. So its liabilities total ₹556.4m more than the combination of its cash and short-term receivables.

Given PPAP Automotive has a market capitalization of ₹3.02b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 PPAP Automotive 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, PPAP Automotive made a loss at the EBIT level, and saw its revenue drop to ₹2.9b, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

While PPAP Automotive's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹29.1m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹33.6m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - PPAP Automotive has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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