Indo National (NSE:NIPPOBATRY) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Indo National Limited (NSE:NIPPOBATRY) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Indo National

How Much Debt Does Indo National Carry?

You can click the graphic below for the historical numbers, but it shows that Indo National had ₹1.18b of debt in September 2022, down from ₹1.24b, one year before. However, because it has a cash reserve of ₹286.6m, its net debt is less, at about ₹896.1m.

How Strong Is Indo National's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Indo National had liabilities of ₹1.83b due within 12 months and liabilities of ₹559.3m due beyond that. Offsetting this, it had ₹286.6m in cash and ₹1.12b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹988.4m.

Indo National has a market capitalization of ₹2.62b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Indo National will need earnings to service that debt. 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, Indo National made a loss at the EBIT level, and saw its revenue drop to ₹5.5b, which is a fall of 4.7%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Indo National produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹110m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹98m. So to be blunt we do think it is risky. 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. For example Indo National has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.