Stock Analysis

Is Setubandhan Infrastructure (NSE:SETUINFRA) Using Debt In A Risky Way?

NSEI:SETUINFRA
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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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Setubandhan Infrastructure Limited (NSE:SETUINFRA) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Setubandhan Infrastructure

What Is Setubandhan Infrastructure's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Setubandhan Infrastructure had ₹787.2m of debt, an increase on ₹744.6m, over one year. 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 November 28th 2021

How Healthy Is Setubandhan Infrastructure's Balance Sheet?

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 these obligations, it had cash of ₹1.87m as well as receivables valued at ₹856.6m 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 ₹194.8m 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 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 made a loss at the EBIT level, and saw its revenue drop to ₹1.1b, which is a fall of 2.8%. We would much prefer see growth.

Caveat Emptor

Importantly, Setubandhan Infrastructure had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₹62m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Setubandhan Infrastructure that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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