Health Check: How Prudently Does Standard Industries (NSE:SIL) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Standard Industries Limited (NSE:SIL) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Standard Industries

How Much Debt Does Standard Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Standard Industries had ₹231.2m of debt, an increase on ₹213.5m, over one year. But on the other hand it also has ₹495.4m in cash, leading to a ₹264.1m net cash position.

A Look At Standard Industries' Liabilities

We can see from the most recent balance sheet that Standard Industries had liabilities of ₹152.3m falling due within a year, and liabilities of ₹296.6m due beyond that. Offsetting these obligations, it had cash of ₹495.4m as well as receivables valued at ₹417.2m due within 12 months. So it actually has ₹463.7m more liquid assets than total liabilities.

It's good to see that Standard Industries has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Standard Industries has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Standard Industries 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.

Over 12 months, Standard Industries made a loss at the EBIT level, and saw its revenue drop to ₹235m, which is a fall of 95%. To be frank that doesn't bode well.

So How Risky Is Standard Industries?

While Standard Industries lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₹96m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should learn about the 4 warning signs we've spotted with Standard Industries (including 1 which is a bit unpleasant) .

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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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.