Health Check: How Prudently Does Anik Industries (NSE:ANIKINDS) Use 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.' 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 Anik Industries Limited (NSE:ANIKINDS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. 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 Anik Industries

What Is Anik Industries's Debt?

The image below, which you can click on for greater detail, shows that at March 2020 Anik Industries had debt of ₹722.2m, up from ₹693.7m in one year. However, its balance sheet shows it holds ₹1.85b in cash, so it actually has ₹1.13b net cash.

How Healthy Is Anik Industries's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anik Industries had liabilities of ₹3.02b due within 12 months and liabilities of ₹637.7m due beyond that. Offsetting these obligations, it had cash of ₹1.85b as well as receivables valued at ₹1.88b due within 12 months. So it actually has ₹78.8m more liquid assets than total liabilities.

It's good to see that Anik Industries has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Anik Industries boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Anik Industries'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 Anik Industries had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₹5.1b. We would much prefer see growth.

So How Risky Is Anik Industries?

Although Anik Industries had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹35m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Anik Industries (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.

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