Sintercom India (NSE:SINTERCOM) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Sintercom India Limited (NSE:SINTERCOM) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sintercom India

How Much Debt Does Sintercom India Carry?

The image below, which you can click on for greater detail, shows that Sintercom India had debt of ₹150.5m at the end of March 2021, a reduction from ₹281.6m over a year. On the flip side, it has ₹82.4m in cash leading to net debt of about ₹68.1m.

How Strong Is Sintercom India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sintercom India had liabilities of ₹365.1m due within 12 months and liabilities of ₹116.5m due beyond that. Offsetting these obligations, it had cash of ₹82.4m as well as receivables valued at ₹213.2m due within 12 months. So it has liabilities totalling ₹186.0m more than its cash and near-term receivables, combined.

Of course, Sintercom India has a market capitalization of ₹2.00b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sintercom India'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.

Over 12 months, Sintercom India made a loss at the EBIT level, and saw its revenue drop to ₹477m, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

Not only did Sintercom India's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹23m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹57m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Sintercom India (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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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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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