Is NRB Industrial Bearings (NSE:NIBL) A Risky Investment?

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. We note that NRB Industrial Bearings Limited (NSE:NIBL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 NRB Industrial Bearings

What Is NRB Industrial Bearings's Debt?

You can click the graphic below for the historical numbers, but it shows that NRB Industrial Bearings had ₹1.02b of debt in March 2021, down from ₹1.08b, one year before. On the flip side, it has ₹43.4m in cash leading to net debt of about ₹979.7m.

A Look At NRB Industrial Bearings' Liabilities

The latest balance sheet data shows that NRB Industrial Bearings had liabilities of ₹798.6m due within a year, and liabilities of ₹473.9m falling due after that. Offsetting these obligations, it had cash of ₹43.4m as well as receivables valued at ₹150.1m due within 12 months. So its liabilities total ₹1.08b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹488.2m 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'd watch its balance sheet closely, without a doubt. After all, NRB Industrial Bearings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is NRB Industrial Bearings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year NRB Industrial Bearings wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to ₹564m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, NRB Industrial Bearings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹29m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of ₹40m and free cash flow of ₹30m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 3 warning signs with NRB Industrial Bearings (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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