Does Murudeshwar Ceramics (NSE:MURUDCERA) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Murudeshwar Ceramics Ltd. (NSE:MURUDCERA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Murudeshwar Ceramics

What Is Murudeshwar Ceramics's Net Debt?

The chart below, which you can click on for greater detail, shows that Murudeshwar Ceramics had ₹831.8m in debt in March 2021; about the same as the year before. On the flip side, it has ₹34.0m in cash leading to net debt of about ₹797.8m.

How Healthy Is Murudeshwar Ceramics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Murudeshwar Ceramics had liabilities of ₹1.07b due within 12 months and liabilities of ₹316.4m due beyond that. Offsetting this, it had ₹34.0m in cash and ₹316.5m in receivables that were due within 12 months. So its liabilities total ₹1.04b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹1.68b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Murudeshwar Ceramics'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, Murudeshwar Ceramics made a loss at the EBIT level, and saw its revenue drop to ₹805m, which is a fall of 22%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Murudeshwar Ceramics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹13m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹79m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Murudeshwar Ceramics you should be aware of, and 1 of them is a bit unpleasant.

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. 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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