Kothari Products (NSE:KOTHARIPRO) Is Carrying A Fair Bit Of Debt

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. We note that Kothari Products Limited (NSE:KOTHARIPRO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kothari Products

What Is Kothari Products's Debt?

As you can see below, Kothari Products had ₹2.75b of debt at March 2023, down from ₹3.43b a year prior. However, because it has a cash reserve of ₹527.1m, its net debt is less, at about ₹2.22b.

A Look At Kothari Products' Liabilities

According to the last reported balance sheet, Kothari Products had liabilities of ₹1.78b due within 12 months, and liabilities of ₹1.48b due beyond 12 months. On the other hand, it had cash of ₹527.1m and ₹9.27b worth of receivables due within a year. So it actually has ₹6.54b more liquid assets than total liabilities.

This surplus liquidity suggests that Kothari Products' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kothari Products will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Kothari Products had a loss before interest and tax, and actually shrunk its revenue by 47%, to ₹12b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Kothari Products's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹216m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Kothari Products (of which 1 is a bit unpleasant!) you should know about.

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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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.