Would Sanghvi Movers (NSE:SANGHVIMOV) Be Better Off With Less Debt?

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.' 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 note that Sanghvi Movers Limited (NSE:SANGHVIMOV) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

View our latest analysis for Sanghvi Movers

What Is Sanghvi Movers's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sanghvi Movers had ₹1.97b of debt in March 2021, down from ₹3.12b, one year before. However, it also had ₹138.2m in cash, and so its net debt is ₹1.83b.

How Strong Is Sanghvi Movers' Balance Sheet?

The latest balance sheet data shows that Sanghvi Movers had liabilities of ₹907.1m due within a year, and liabilities of ₹1.58b falling due after that. Offsetting this, it had ₹138.2m in cash and ₹820.3m in receivables that were due within 12 months. So its liabilities total ₹1.53b more than the combination of its cash and short-term receivables.

Of course, Sanghvi Movers has a market capitalization of ₹8.44b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Sanghvi Movers's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Sanghvi Movers had a loss before interest and tax, and actually shrunk its revenue by 31%, to ₹2.2b. To be frank that doesn't bode well.

Caveat Emptor

While Sanghvi Movers's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹185m. 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 ₹224m. So in short it's a really risky stock. 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 Sanghvi Movers has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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