Does Setubandhan Infrastructure (NSE:SETUINFRA) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Setubandhan Infrastructure Limited (NSE:SETUINFRA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Setubandhan Infrastructure

How Much Debt Does Setubandhan Infrastructure Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Setubandhan Infrastructure had debt of ₹777.5m, up from ₹723.5m in one year. However, it also had ₹15.9m in cash, and so its net debt is ₹761.6m.

A Look At Setubandhan Infrastructure's Liabilities

The latest balance sheet data shows that Setubandhan Infrastructure had liabilities of ₹989.4m due within a year, and liabilities of ₹277.3m falling due after that. On the other hand, it had cash of ₹15.9m and ₹378.8m worth of receivables due within a year. So its liabilities total ₹871.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹237.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Setubandhan Infrastructure would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Setubandhan Infrastructure 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 Setubandhan Infrastructure had a loss before interest and tax, and actually shrunk its revenue by 63%, to ₹576m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Setubandhan Infrastructure's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹277m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized ₹108m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. 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 Setubandhan Infrastructure (including 3 which can't be ignored) .

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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