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 note that SML Isuzu Limited (NSE:SMLISUZU) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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?

As you can see below, at the end of March 2022, SML Isuzu had ₹2.91b of debt, up from ₹2.53b a year ago. Click the image for more detail. However, it also had ₹136.3m in cash, and so its net debt is ₹2.77b.

A Look At SML Isuzu's Liabilities

The latest balance sheet data shows that SML Isuzu had liabilities of ₹5.93b due within a year, and liabilities of ₹609.5m falling due after that. Offsetting this, it had ₹136.3m in cash and ₹795.3m in receivables that were due within 12 months. So it has liabilities totalling ₹5.61b more than its cash and near-term receivables, combined.

SML Isuzu has a market capitalization of ₹10.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SML Isuzu 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.

In the last year SML Isuzu wasn't profitable at an EBIT level, but managed to grow its revenue by 56%, to ₹9.2b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though SML Isuzu managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₹847m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹376m of cash over the last year. So suffice it to say we do consider the stock to be 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. We've identified 2 warning signs with SML Isuzu , and understanding them should be part of your investment process.

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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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.