Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that A2Z Infra Engineering Limited (NSE:A2ZINFRA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for A2Z Infra Engineering
What Is A2Z Infra Engineering's Debt?
The image below, which you can click on for greater detail, shows that A2Z Infra Engineering had debt of ₹3.80b at the end of September 2022, a reduction from ₹4.86b over a year. However, it also had ₹110.9m in cash, and so its net debt is ₹3.69b.
How Strong Is A2Z Infra Engineering's Balance Sheet?
According to the last reported balance sheet, A2Z Infra Engineering had liabilities of ₹10.8b due within 12 months, and liabilities of ₹897.7m due beyond 12 months. Offsetting these obligations, it had cash of ₹110.9m as well as receivables valued at ₹4.76b due within 12 months. So it has liabilities totalling ₹6.83b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the ₹1.21b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, A2Z Infra Engineering would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is A2Z Infra Engineering's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, A2Z Infra Engineering made a loss at the EBIT level, and saw its revenue drop to ₹3.6b, which is a fall of 9.1%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months A2Z Infra Engineering produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₹1.8b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost ₹736m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that A2Z Infra Engineering is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About NSEI:A2ZINFRA
A2Z Infra Engineering
Offers engineering, procurement, construction, and facility management services in India and internationally.
Low and slightly overvalued.