Is Tantia Constructions (NSE:TCLCONS) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Tantia Constructions Limited (NSE:TCLCONS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tantia Constructions

What Is Tantia Constructions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tantia Constructions had ₹2.92b of debt in September 2023, down from ₹3.38b, one year before. On the flip side, it has ₹93.2m in cash leading to net debt of about ₹2.82b.

How Healthy Is Tantia Constructions' Balance Sheet?

According to the last reported balance sheet, Tantia Constructions had liabilities of ₹4.59b due within 12 months, and liabilities of ₹60.6m due beyond 12 months. On the other hand, it had cash of ₹93.2m and ₹283.5m worth of receivables due within a year. So it has liabilities totalling ₹4.27b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹536.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Tantia Constructions would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tantia Constructions'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.

In the last year Tantia Constructions had a loss before interest and tax, and actually shrunk its revenue by 8.4%, to ₹811m. That's not what we would hope to see.

Caveat Emptor

Importantly, Tantia Constructions had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹55m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But we note that trailing twelve month EBIT is worse than the free cash flow of ₹202m and the profit of ₹51m. So its situation may not be as precarious as the EBIT would imply. 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. Case in point: We've spotted 4 warning signs for Tantia Constructions you should be aware of, and 3 of them don't sit too well with us.

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.