Is Sundaram Brake Linings (NSE:SUNDRMBRAK) A Risky Investment?

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. We note that Sundaram Brake Linings Limited (NSE:SUNDRMBRAK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sundaram Brake Linings

How Much Debt Does Sundaram Brake Linings Carry?

You can click the graphic below for the historical numbers, but it shows that Sundaram Brake Linings had ₹204.2m of debt in September 2020, down from ₹312.1m, one year before. However, because it has a cash reserve of ₹71.0m, its net debt is less, at about ₹133.2m.

A Look At Sundaram Brake Linings's Liabilities

Zooming in on the latest balance sheet data, we can see that Sundaram Brake Linings had liabilities of ₹661.3m due within 12 months and liabilities of ₹243.6m due beyond that. Offsetting these obligations, it had cash of ₹71.0m as well as receivables valued at ₹514.3m due within 12 months. So its liabilities total ₹319.7m more than the combination of its cash and short-term receivables.

Sundaram Brake Linings has a market capitalization of ₹1.22b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Sundaram Brake Linings'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, Sundaram Brake Linings made a loss at the EBIT level, and saw its revenue drop to ₹2.2b, which is a fall of 22%. That makes us nervous, to say the least.

Caveat Emptor

While Sundaram Brake Linings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹1.8m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₹118m and the profit of ₹5.5m. So one might argue that there's still a chance it can get things on the right track. 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 - Sundaram Brake Linings has 3 warning signs we think 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. 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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