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. We note that Indiabulls Integrated Services Limited (NSE:IBULISL) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Indiabulls Integrated Services Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Indiabulls Integrated Services had ₹14.6b of debt, an increase on ₹6.9k, over one year. However, it also had ₹3.26b in cash, and so its net debt is ₹11.4b.
How Healthy Is Indiabulls Integrated Services’s Balance Sheet?
We can see from the most recent balance sheet that Indiabulls Integrated Services had liabilities of ₹18.0b falling due within a year, and liabilities of ₹473.0m due beyond that. On the other hand, it had cash of ₹3.26b and ₹2.65b worth of receivables due within a year. So its liabilities total ₹12.5b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company’s ₹12.0b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Indiabulls Integrated Services 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.
In the last year Indiabulls Integrated Services had negative earnings before interest and tax, and actually shrunk its revenue by 5.8%, to ₹2.1b. We would much prefer see growth.
Over the last twelve months Indiabulls Integrated Services produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₹2.8b 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. Not least because it burned through ₹5.8b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 4 warning signs for Indiabulls Integrated Services you should be aware of, and 2 of them make us uncomfortable.
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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