PSP Projects (NSE:PSPPROJECT) Has A Somewhat Strained Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies PSP Projects Limited (NSE:PSPPROJECT) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for PSP Projects

What Is PSP Projects's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 PSP Projects had debt of ₹1.18b, up from ₹752.9m in one year. But it also has ₹2.92b in cash to offset that, meaning it has ₹1.75b net cash.

A Look At PSP Projects's Liabilities

According to the last reported balance sheet, PSP Projects had liabilities of ₹4.18b due within 12 months, and liabilities of ₹39.9m due beyond 12 months. Offsetting these obligations, it had cash of ₹2.92b as well as receivables valued at ₹2.10b due within 12 months. So it can boast ₹810.6m more liquid assets than total liabilities.

This short term liquidity is a sign that PSP Projects could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, PSP Projects boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that PSP Projects's load is not too heavy, because its EBIT was down 29% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if PSP Projects can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PSP Projects may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, PSP Projects burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case PSP Projects has ₹1.75b in net cash and a decent-looking balance sheet. So while PSP Projects does not have a great balance sheet, it's certainly not too bad. 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 2 warning signs we've spotted with PSP Projects (including 1 which is makes us a bit uncomfortable) .

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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