Is MBL Infrastructures (NSE:MBLINFRA) Using Too Much 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 note that MBL Infrastructures Limited (NSE:MBLINFRA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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 MBL Infrastructures

What Is MBL Infrastructures's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 MBL Infrastructures had ₹12.5b of debt, an increase on ₹11.8b, over one year. On the flip side, it has ₹430.3m in cash leading to net debt of about ₹12.1b.

A Look At MBL Infrastructures' Liabilities

According to the last reported balance sheet, MBL Infrastructures had liabilities of ₹7.34b due within 12 months, and liabilities of ₹14.7b due beyond 12 months. On the other hand, it had cash of ₹430.3m and ₹1.73b worth of receivables due within a year. So it has liabilities totalling ₹19.9b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹2.07b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, MBL Infrastructures would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is MBL Infrastructures'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.

In the last year MBL Infrastructures wasn't profitable at an EBIT level, but managed to grow its revenue by 9.1%, to ₹2.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months MBL Infrastructures produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₹1.1b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated ₹17m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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. We've identified 4 warning signs with MBL Infrastructures (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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