Kothari Products (NSE:KOTHARIPRO) Is Carrying A Fair Bit Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Kothari Products Limited (NSE:KOTHARIPRO) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kothari Products

What Is Kothari Products's Net Debt?

The image below, which you can click on for greater detail, shows that Kothari Products had debt of ₹772.3m at the end of September 2024, a reduction from ₹1.45b over a year. However, it does have ₹449.2m in cash offsetting this, leading to net debt of about ₹323.1m.

How Healthy Is Kothari Products' Balance Sheet?

According to the last reported balance sheet, Kothari Products had liabilities of ₹1.05b due within 12 months, and liabilities of ₹489.3m due beyond 12 months. On the other hand, it had cash of ₹449.2m and ₹7.06b worth of receivables due within a year. So it can boast ₹5.97b more liquid assets than total liabilities.

This surplus strongly suggests that Kothari Products has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. There's no doubt that we learn most about debt from the balance sheet. 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 2.7%, to ₹10b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Kothari Products produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₹1.3b. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. 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 significant!) 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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