Stock Analysis

We Think W.S. Industries (India) (NSE:WSI) Is Taking Some Risk With Its Debt

NSEI:WSI
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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. As with many other companies W.S. Industries (India) Limited (NSE:WSI) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for W.S. Industries (India)

What Is W.S. Industries (India)'s Debt?

The image below, which you can click on for greater detail, shows that W.S. Industries (India) had debt of ₹642.5m at the end of March 2023, a reduction from ₹873.6m over a year. However, it also had ₹28.0m in cash, and so its net debt is ₹614.5m.

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NSEI:WSI Debt to Equity History June 2nd 2023

How Strong Is W.S. Industries (India)'s Balance Sheet?

According to the last reported balance sheet, W.S. Industries (India) had liabilities of ₹1.38b due within 12 months, and liabilities of ₹365.0m due beyond 12 months. On the other hand, it had cash of ₹28.0m and ₹848.9m worth of receivables due within a year. So its liabilities total ₹863.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because W.S. Industries (India) is worth ₹3.41b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.72 times and a disturbingly high net debt to EBITDA ratio of 18.8 hit our confidence in W.S. Industries (India) like a one-two punch to the gut. The debt burden here is substantial. However, the silver lining was that W.S. Industries (India) achieved a positive EBIT of ₹31m in the last twelve months, an improvement on the prior year's loss. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since W.S. Industries (India) will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, W.S. Industries (India) saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both W.S. Industries (India)'s interest cover and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. Having said that, its ability to handle its total liabilities isn't such a worry. Overall, we think it's fair to say that W.S. Industries (India) has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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 5 warning signs for W.S. Industries (India) (3 are a bit concerning) 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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Find out whether W.S. Industries (India) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.