Is SML Isuzu (NSE:SMLISUZU) A Risky Investment?

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 SML Isuzu Limited (NSE:SMLISUZU) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SML Isuzu

How Much Debt Does SML Isuzu Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 SML Isuzu had ₹3.51b of debt, an increase on ₹2.90b, over one year. However, it also had ₹366.9m in cash, and so its net debt is ₹3.14b.

How Strong Is SML Isuzu's Balance Sheet?

We can see from the most recent balance sheet that SML Isuzu had liabilities of ₹5.40b falling due within a year, and liabilities of ₹771.4m due beyond that. Offsetting this, it had ₹366.9m in cash and ₹564.6m in receivables that were due within 12 months. So its liabilities total ₹5.24b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹8.02b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is SML Isuzu's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year SML Isuzu wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to ₹8.4b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate SML Isuzu's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable ₹926m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹60m of cash over the last year. So to be blunt we think it is risky. 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. Case in point: We've spotted 2 warning signs for SML Isuzu you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

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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.