Is A2Z Infra Engineering (NSE:A2ZINFRA) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, A2Z Infra Engineering Limited (NSE:A2ZINFRA) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 A2Z Infra Engineering

What Is A2Z Infra Engineering's Debt?

You can click the graphic below for the historical numbers, but it shows that A2Z Infra Engineering had ₹3.63b of debt in March 2021, down from ₹4.79b, one year before. However, because it has a cash reserve of ₹2.13b, its net debt is less, at about ₹1.50b.

A Look At A2Z Infra Engineering's Liabilities

According to the last reported balance sheet, A2Z Infra Engineering had liabilities of ₹14.8b due within 12 months, and liabilities of ₹572.5m due beyond 12 months. On the other hand, it had cash of ₹2.13b and ₹9.93b worth of receivables due within a year. So its liabilities total ₹3.35b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹808.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, A2Z Infra Engineering would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is A2Z Infra Engineering'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.

In the last year A2Z Infra Engineering had a loss before interest and tax, and actually shrunk its revenue by 29%, to ₹4.2b. That makes us nervous, to say the least.

Caveat Emptor

While A2Z Infra Engineering's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹392m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₹106m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For example A2Z Infra Engineering has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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. 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.
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