These 4 Measures Indicate That Kabra Extrusiontechnik (NSE:KABRAEXTRU) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Kabra Extrusiontechnik Limited (NSE:KABRAEXTRU) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Kabra Extrusiontechnik

How Much Debt Does Kabra Extrusiontechnik Carry?

As you can see below, at the end of September 2020, Kabra Extrusiontechnik had ₹291.1m of debt, up from ₹136.6m a year ago. Click the image for more detail. But it also has ₹497.2m in cash to offset that, meaning it has ₹206.2m net cash.

A Look At Kabra Extrusiontechnik's Liabilities

The latest balance sheet data shows that Kabra Extrusiontechnik had liabilities of ₹1.19b due within a year, and liabilities of ₹171.1m falling due after that. Offsetting these obligations, it had cash of ₹497.2m as well as receivables valued at ₹339.9m due within 12 months. So it has liabilities totalling ₹525.6m more than its cash and near-term receivables, combined.

Given Kabra Extrusiontechnik has a market capitalization of ₹4.69b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Kabra Extrusiontechnik boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Kabra Extrusiontechnik saw its EBIT decline by 5.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kabra Extrusiontechnik'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. While Kabra Extrusiontechnik has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Kabra Extrusiontechnik burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although Kabra Extrusiontechnik's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹206.2m. So we are not troubled with Kabra Extrusiontechnik's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Kabra Extrusiontechnik has 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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