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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Tijaria Polypipes Limited (NSE:TIJARIA) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tijaria Polypipes

What Is Tijaria Polypipes's Debt?

As you can see below, Tijaria Polypipes had ₹539.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₹32.7m in cash, and so its net debt is ₹506.8m.

How Healthy Is Tijaria Polypipes' Balance Sheet?

According to the last reported balance sheet, Tijaria Polypipes had liabilities of ₹485.4m due within 12 months, and liabilities of ₹382.7m due beyond 12 months. Offsetting these obligations, it had cash of ₹32.7m as well as receivables valued at ₹330.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹505.4m.

The deficiency here weighs heavily on the ₹196.1m 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 definitely think shareholders need to watch this one closely. 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 you can't view debt in total isolation; since Tijaria Polypipes 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.

Over 12 months, Tijaria Polypipes made a loss at the EBIT level, and saw its revenue drop to ₹514m, which is a fall of 40%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Tijaria Polypipes'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 ₹53m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹114m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Tijaria Polypipes (of which 1 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. 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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