Does Kokuyo Camlin (NSE:KOKUYOCMLN) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Kokuyo Camlin Limited (NSE:KOKUYOCMLN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, 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.

See our latest analysis for Kokuyo Camlin

What Is Kokuyo Camlin's Debt?

You can click the graphic below for the historical numbers, but it shows that Kokuyo Camlin had ₹716.4m of debt in March 2021, down from ₹1.26b, one year before. However, it also had ₹70.5m in cash, and so its net debt is ₹645.9m.

How Strong Is Kokuyo Camlin's Balance Sheet?

The latest balance sheet data shows that Kokuyo Camlin had liabilities of ₹1.27b due within a year, and liabilities of ₹201.3m falling due after that. Offsetting these obligations, it had cash of ₹70.5m as well as receivables valued at ₹512.2m due within 12 months. So it has liabilities totalling ₹884.6m more than its cash and near-term receivables, combined.

Given Kokuyo Camlin has a market capitalization of ₹7.60b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kokuyo Camlin 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 Kokuyo Camlin had a loss before interest and tax, and actually shrunk its revenue by 36%, to ₹4.0b. To be frank that doesn't bode well.

Caveat Emptor

While Kokuyo Camlin's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹96m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹146m. In the meantime, we consider the stock very risky. 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. Case in point: We've spotted 2 warning signs for Kokuyo Camlin you should be aware of, and 1 of them can't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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