Would Tantia Constructions (NSE:TCLCONS) Be Better Off With Less 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 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. As with many other companies Tantia Constructions Limited (NSE:TCLCONS) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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

How Much Debt Does Tantia Constructions Carry?

As you can see below, Tantia Constructions had ₹2.92b of debt at September 2023, down from ₹3.38b a year prior. However, it does have ₹93.2m in cash offsetting this, leading to net debt of about ₹2.82b.

How Strong Is Tantia Constructions' Balance Sheet?

We can see from the most recent balance sheet that Tantia Constructions had liabilities of ₹4.59b falling due within a year, and liabilities of ₹60.6m due beyond that. Offsetting this, it had ₹93.2m in cash and ₹283.5m in receivables that were due within 12 months. So its liabilities total ₹4.27b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹6.81b, so it does suggest shareholders should keep an eye on Tantia Constructions' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tantia Constructions 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 Tantia Constructions had a loss before interest and tax, and actually shrunk its revenue by 14%, to ₹730m. We would much prefer see growth.

Caveat Emptor

Not only did Tantia Constructions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹34m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of ₹202m and a profit of ₹93m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Tantia Constructions (of which 2 shouldn't be ignored!) you should know about.

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.