Is Tijaria Polypipes (NSE:TIJARIA) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Tijaria Polypipes Limited (NSE:TIJARIA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tijaria Polypipes

How Much Debt Does Tijaria Polypipes Carry?

The chart below, which you can click on for greater detail, shows that Tijaria Polypipes had ₹539.5m in debt in September 2020; about the same as the year before. However, it does have ₹32.7m in cash offsetting this, leading to net debt of about ₹506.8m.

A Look At Tijaria Polypipes's Liabilities

The latest balance sheet data shows that Tijaria Polypipes had liabilities of ₹485.4m due within a year, and liabilities of ₹382.7m falling due after that. Offsetting this, it had ₹32.7m in cash and ₹330.1m in receivables that were due within 12 months. So its liabilities total ₹505.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹214.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tijaria Polypipes would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tijaria Polypipes'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.

Over 12 months, Tijaria Polypipes made a loss at the EBIT level, and saw its revenue drop to ₹465m, which is a fall of 56%. That makes us nervous, to say the least.

Caveat Emptor

While Tijaria Polypipes's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹44m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₹107m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Tijaria Polypipes you should be aware of, and 1 of them is a bit concerning.

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. 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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