Stock Analysis

Is Setubandhan Infrastructure (NSE:SETUINFRA) A Risky Investment?

NSEI:SETUINFRA
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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.' 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 Setubandhan Infrastructure Limited (NSE:SETUINFRA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 September 2021 Setubandhan Infrastructure had debt of ₹787.2m, up from ₹744.6m in one year. Net debt is about the same, since the it doesn't have much cash.

debt-equity-history-analysis
NSEI:SETUINFRA Debt to Equity History March 16th 2022

A Look At Setubandhan Infrastructure's Liabilities

Zooming in on the latest balance sheet data, we can see that Setubandhan Infrastructure had liabilities of ₹1.53b due within 12 months and liabilities of ₹275.5m due beyond that. Offsetting this, it had ₹1.87m in cash and ₹856.6m in receivables that were due within 12 months. So its liabilities total ₹945.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹341.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Setubandhan Infrastructure would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Setubandhan Infrastructure'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.

In the last year Setubandhan Infrastructure wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to ₹1.2b. With any luck the company will be able to grow its way to profitability.

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. To be specific the EBIT loss came in at ₹26m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₹47m in cash over the last twelve months, and it doesn't have much by way of liquid assets. 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. 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. For example Setubandhan Infrastructure has 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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

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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.