Is Shriram EPC (NSE:SHRIRAMEPC) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Shriram EPC Limited (NSE:SHRIRAMEPC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Shriram EPC

What Is Shriram EPC's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Shriram EPC had ₹8.36b of debt, an increase on ₹6.84b, over one year. However, it does have ₹1.07b in cash offsetting this, leading to net debt of about ₹7.29b.

How Healthy Is Shriram EPC's Balance Sheet?

The latest balance sheet data shows that Shriram EPC had liabilities of ₹11.1b due within a year, and liabilities of ₹2.99b falling due after that. On the other hand, it had cash of ₹1.07b and ₹3.41b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹9.64b.

The deficiency here weighs heavily on the ₹5.41b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Shriram EPC would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shriram EPC'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.

Over 12 months, Shriram EPC made a loss at the EBIT level, and saw its revenue drop to ₹5.8b, which is a fall of 52%. To be frank that doesn't bode well.

Caveat Emptor

While Shriram EPC's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹835m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₹562m in negative free cash flow over the last year. That means it's on the risky side of things. 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 instance, we've identified 2 warning signs for Shriram EPC 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.

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