Is Indo National (NSE:NIPPOBATRY) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Indo National Limited (NSE:NIPPOBATRY) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Indo National

What Is Indo National's Debt?

As you can see below, at the end of March 2023, Indo National had ₹1.32b of debt, up from ₹1.24b a year ago. Click the image for more detail. On the flip side, it has ₹233.8m in cash leading to net debt of about ₹1.08b.

A Look At Indo National's Liabilities

The latest balance sheet data shows that Indo National had liabilities of ₹1.96b due within a year, and liabilities of ₹565.0m falling due after that. On the other hand, it had cash of ₹233.8m and ₹1.29b worth of receivables due within a year. So its liabilities total ₹1.00b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Indo National has a market capitalization of ₹2.93b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Indo National will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Indo National's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Indo National had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹23m. 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. We would feel better if it turned its trailing twelve month loss of ₹57m into a profit. 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. To that end, you should learn about the 4 warning signs we've spotted with Indo National (including 1 which is a bit unpleasant) .

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.

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