We Think Kabra Extrusiontechnik (NSE:KABRAEXTRU) Is Taking Some Risk With Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

View our latest analysis for Kabra Extrusiontechnik

How Much Debt Does Kabra Extrusiontechnik Carry?

The image below, which you can click on for greater detail, shows that Kabra Extrusiontechnik had debt of ₹837.5m at the end of September 2023, a reduction from ₹1.08b over a year. However, it does have ₹1.08b in cash offsetting this, leading to net cash of ₹239.6m.

How Healthy Is Kabra Extrusiontechnik's Balance Sheet?

We can see from the most recent balance sheet that Kabra Extrusiontechnik had liabilities of ₹2.76b falling due within a year, and liabilities of ₹208.7m due beyond that. Offsetting this, it had ₹1.08b in cash and ₹1.15b in receivables that were due within 12 months. So its liabilities total ₹740.8m more than the combination of its cash and short-term receivables.

Of course, Kabra Extrusiontechnik has a market capitalization of ₹10.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Kabra Extrusiontechnik also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Kabra Extrusiontechnik if management cannot prevent a repeat of the 24% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kabra Extrusiontechnik 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. Over the last three years, Kabra Extrusiontechnik saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kabra Extrusiontechnik has ₹239.6m in net cash. So although we see some areas for improvement, we're not too worried about Kabra Extrusiontechnik's balance sheet. 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 2 warning signs we think you should be aware of.

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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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.