Is Precision Camshafts (NSE:PRECAM) Using Too Much Debt?

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. Importantly, Precision Camshafts Limited (NSE:PRECAM) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Precision Camshafts

What Is Precision Camshafts's Net Debt?

The image below, which you can click on for greater detail, shows that Precision Camshafts had debt of ₹1.51b at the end of September 2020, a reduction from ₹1.86b over a year. However, its balance sheet shows it holds ₹2.54b in cash, so it actually has ₹1.03b net cash.

A Look At Precision Camshafts' Liabilities

According to the last reported balance sheet, Precision Camshafts had liabilities of ₹1.81b due within 12 months, and liabilities of ₹1.59b due beyond 12 months. On the other hand, it had cash of ₹2.54b and ₹1.37b worth of receivables due within a year. So it actually has ₹516.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Precision Camshafts could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Precision Camshafts has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Precision Camshafts will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Precision Camshafts had a loss before interest and tax, and actually shrunk its revenue by 14%, to ₹6.5b. We would much prefer see growth.

So How Risky Is Precision Camshafts?

While Precision Camshafts lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₹221m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 5 warning signs for Precision Camshafts you should be aware of, and 1 of them is potentially serious.

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.

If you decide to trade Precision Camshafts, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.