David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Kaushalya Infrastructure Development Corporation Limited (NSE:KAUSHALYA) does carry 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 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Kaushalya Infrastructure Development Carry?
As you can see below, Kaushalya Infrastructure Development had ₹240.0m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₹5.61m in cash leading to net debt of about ₹234.4m.
How Healthy Is Kaushalya Infrastructure Development's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Kaushalya Infrastructure Development had liabilities of ₹281.5m due within 12 months and liabilities of ₹846.0k due beyond that. On the other hand, it had cash of ₹5.61m and ₹84.5m worth of receivables due within a year. So it has liabilities totalling ₹192.2m more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's ₹192.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kaushalya Infrastructure Development'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.
Over 12 months, Kaushalya Infrastructure Development made a loss at the EBIT level, and saw its revenue drop to ₹2.4m, which is a fall of 89%. To be frank that doesn't bode well.
Not only did Kaushalya Infrastructure Development's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹35m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₹22m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For example, we've discovered 5 warning signs for Kaushalya Infrastructure Development (4 are a bit concerning!) that you should be aware of before investing here.
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.
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.