We Think Kabra Extrusiontechnik (NSE:KABRAEXTRU) Can Stay On Top Of Its Debt

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. As with many other companies Kabra Extrusiontechnik Limited (NSE:KABRAEXTRU) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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 Kabra Extrusiontechnik

What Is Kabra Extrusiontechnik's Debt?

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. However, it does have ₹497.2m in cash offsetting this, leading to net cash of ₹206.2m.

A Look At Kabra Extrusiontechnik's Liabilities

Zooming in on the latest balance sheet data, we can see that Kabra Extrusiontechnik had liabilities of ₹1.19b due within 12 months and liabilities of ₹171.1m due beyond that. Offsetting this, it had ₹497.2m in cash and ₹339.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹525.6m.

While this might seem like a lot, it is not so bad since Kabra Extrusiontechnik has a market capitalization of ₹2.49b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Kabra Extrusiontechnik boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Kabra Extrusiontechnik's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kabra Extrusiontechnik will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Kabra Extrusiontechnik created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While Kabra Extrusiontechnik does have more liabilities than liquid assets, it also has net cash of ₹206.2m. So we are not troubled with Kabra Extrusiontechnik's debt use. 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. Be aware that Kabra Extrusiontechnik is showing 4 warning signs in our investment analysis , and 1 of those is significant...

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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