Is Marshall Machines (NSE:MARSHALL) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Marshall Machines Limited (NSE:MARSHALL) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Marshall Machines

What Is Marshall Machines's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Marshall Machines had ₹452.5m of debt, an increase on ₹401.8m, over one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Marshall Machines' Balance Sheet?

We can see from the most recent balance sheet that Marshall Machines had liabilities of ₹803.1m falling due within a year, and liabilities of ₹214.5m due beyond that. Offsetting this, it had ₹3.08m in cash and ₹284.0m in receivables that were due within 12 months. So its liabilities total ₹730.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹863.5m, so it does suggest shareholders should keep an eye on Marshall Machines' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Marshall Machines'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, Marshall Machines made a loss at the EBIT level, and saw its revenue drop to ₹384m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

While Marshall Machines's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹48m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹7.3m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with Marshall Machines (including 2 which don't sit too well with us) .

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.