Stock Analysis

Health Check: How Prudently Does Setubandhan Infrastructure (NSE:SETUINFRA) Use Debt?

NSEI:SETUINFRA
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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.' 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. Importantly, Setubandhan Infrastructure Limited (NSE:SETUINFRA) does carry debt. But the real question is whether this debt is making the company risky.

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 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.

View our latest analysis for Setubandhan Infrastructure

What Is Setubandhan Infrastructure's Debt?

The chart below, which you can click on for greater detail, shows that Setubandhan Infrastructure had ₹793.7m in debt in March 2022; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

debt-equity-history-analysis
NSEI:SETUINFRA Debt to Equity History June 30th 2022

How Healthy Is Setubandhan Infrastructure's Balance Sheet?

We can see from the most recent balance sheet that Setubandhan Infrastructure had liabilities of ₹1.31b falling due within a year, and liabilities of ₹266.2m due beyond that. On the other hand, it had cash of ₹11.8m and ₹640.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹924.1m.

This deficit casts a shadow over the ₹295.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Setubandhan Infrastructure would likely require a major re-capitalisation if it had to pay its creditors today. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Setubandhan Infrastructure reported revenue of ₹1.1b, which is a gain of 97%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Setubandhan Infrastructure managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping ₹49m. 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. But we think that is unlikely, given it is low on liquid assets, and burned through ₹13m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Setubandhan Infrastructure (3 are a bit concerning!) that you should be aware of before investing here.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Setubandhan Infrastructure is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.