We Think Sanghvi Movers (NSE:SANGHVIMOV) Has A Fair Chunk Of Debt

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. As with many other companies Sanghvi Movers Limited (NSE:SANGHVIMOV) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sanghvi Movers

What Is Sanghvi Movers's Net Debt?

As you can see below, Sanghvi Movers had ₹2.68b of debt at September 2020, down from ₹3.84b a year prior. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Sanghvi Movers' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sanghvi Movers had liabilities of ₹1.40b due within 12 months and liabilities of ₹1.62b due beyond that. On the other hand, it had cash of ₹10.6m and ₹735.9m worth of receivables due within a year. So it has liabilities totalling ₹2.27b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Sanghvi Movers is worth ₹4.90b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sanghvi Movers'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.

Over 12 months, Sanghvi Movers made a loss at the EBIT level, and saw its revenue drop to ₹2.2b, which is a fall of 35%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sanghvi Movers's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹344m 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹317m. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sanghvi Movers (of which 1 can't be ignored!) you should know about.

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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