Stock Analysis

These 4 Measures Indicate That Everest Industries (NSE:EVERESTIND) Is Using Debt Reasonably Well

NSEI:EVERESTIND
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Everest Industries Limited (NSE:EVERESTIND) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Everest Industries

What Is Everest Industries's Debt?

The image below, which you can click on for greater detail, shows that Everest Industries had debt of ₹443.6m at the end of September 2020, a reduction from ₹627.1m over a year. But on the other hand it also has ₹2.18b in cash, leading to a ₹1.74b net cash position.

debt-equity-history-analysis
NSEI:EVERESTIND Debt to Equity History December 2nd 2020

How Healthy Is Everest Industries's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Everest Industries had liabilities of ₹3.52b due within 12 months and liabilities of ₹792.1m due beyond that. Offsetting these obligations, it had cash of ₹2.18b as well as receivables valued at ₹586.3m due within 12 months. So it has liabilities totalling ₹1.55b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Everest Industries is worth ₹4.12b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Everest Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Everest Industries's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Everest Industries'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Everest Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Everest Industries actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Everest Industries's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.74b. The cherry on top was that in converted 152% of that EBIT to free cash flow, bringing in ₹2.3b. So we are not troubled with Everest Industries's debt use. 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 example, we've discovered 3 warning signs for Everest Industries (1 is potentially serious!) that you should be aware of before investing here.

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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