Sundaram Brake Linings (NSE:SUNDRMBRAK) 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.' 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. As with many other companies Sundaram Brake Linings Limited (NSE:SUNDRMBRAK) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sundaram Brake Linings

What Is Sundaram Brake Linings's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Sundaram Brake Linings had debt of ₹499.7m, up from ₹416.4m in one year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Sundaram Brake Linings' Balance Sheet?

According to the last reported balance sheet, Sundaram Brake Linings had liabilities of ₹1.06b due within 12 months, and liabilities of ₹147.7m due beyond 12 months. On the other hand, it had cash of ₹2.54m and ₹689.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹514.1m.

While this might seem like a lot, it is not so bad since Sundaram Brake Linings has a market capitalization of ₹1.41b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 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.

Over 12 months, Sundaram Brake Linings reported revenue of ₹3.6b, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Sundaram Brake Linings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at ₹17m. 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 ₹47m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Sundaram Brake Linings (1 is a bit unpleasant) 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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