Kokuyo Camlin (NSE:KOKUYOCMLN) Is Carrying A Fair Bit Of 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.' 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. As with many other companies Kokuyo Camlin Limited (NSE:KOKUYOCMLN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Kokuyo Camlin

What Is Kokuyo Camlin's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kokuyo Camlin had ₹704.7m of debt in March 2022, down from ₹793.6m, one year before. However, it also had ₹72.6m in cash, and so its net debt is ₹632.2m.

How Strong Is Kokuyo Camlin's Balance Sheet?

According to the last reported balance sheet, Kokuyo Camlin had liabilities of ₹1.38b due within 12 months, and liabilities of ₹116.1m due beyond 12 months. Offsetting these obligations, it had cash of ₹72.6m as well as receivables valued at ₹594.4m due within 12 months. So its liabilities total ₹825.6m more than the combination of its cash and short-term receivables.

Given Kokuyo Camlin has a market capitalization of ₹6.33b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kokuyo Camlin's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Kokuyo Camlin wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to ₹5.1b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Kokuyo Camlin's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at ₹4.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹47m. So to be blunt we do think it is risky. 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. We've identified 2 warning signs with Kokuyo Camlin (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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. 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.