Here's Why Sundaram Brake Linings (NSE:SUNDRMBRAK) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Sundaram Brake Linings Limited (NSE:SUNDRMBRAK) does carry debt. But the real question is whether this debt is making the company risky.

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Sundaram Brake Linings

How Much Debt Does Sundaram Brake Linings Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Sundaram Brake Linings had debt of ₹416.4m, up from ₹297.7m in one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Sundaram Brake Linings' Balance Sheet?

The latest balance sheet data shows that Sundaram Brake Linings had liabilities of ₹958.1m due within a year, and liabilities of ₹106.7m falling due after that. Offsetting this, it had ₹2.90m in cash and ₹644.7m in receivables that were due within 12 months. So it has liabilities totalling ₹417.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Sundaram Brake Linings is worth ₹1.42b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sundaram Brake Linings 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.

In the last year Sundaram Brake Linings wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to ₹3.0b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Sundaram Brake Linings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹35m. 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. Another cause for caution is that is bled ₹105m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 5 warning signs for Sundaram Brake Linings (2 are significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.