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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that SML Isuzu Limited (NSE:SMLISUZU) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for SML Isuzu
What Is SML Isuzu's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 SML Isuzu had ₹2.80b of debt, an increase on ₹1.42b, over one year. However, it also had ₹498.3m in cash, and so its net debt is ₹2.30b.
How Strong Is SML Isuzu's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SML Isuzu had liabilities of ₹4.01b due within 12 months and liabilities of ₹1.19b due beyond that. Offsetting this, it had ₹498.3m in cash and ₹239.6m in receivables that were due within 12 months. So its liabilities total ₹4.46b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of ₹5.96b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 56%, to ₹6.0b. That makes us nervous, to say the least.
Caveat Emptor
Not only did SML Isuzu's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹1.1b 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 ₹1.0b of cash over the last year. So suffice it to say we consider the stock very risky. 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 3 warning signs for SML Isuzu (2 are a bit unpleasant) you should be aware of.
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. 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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About NSEI:SMLISUZU
SML Isuzu
Manufactures and sells commercial vehicles and related parts in India and internationally.
Outstanding track record with adequate balance sheet and pays a dividend.
