Kokuyo Camlin (NSE:KOKUYOCMLN) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Kokuyo Camlin Limited (NSE:KOKUYOCMLN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kokuyo Camlin

What Is Kokuyo Camlin's Debt?

As you can see below, Kokuyo Camlin had ₹1.11b of debt at September 2020, down from ₹1.26b a year prior. However, because it has a cash reserve of ₹129.4m, its net debt is less, at about ₹983.1m.

A Look At Kokuyo Camlin's Liabilities

We can see from the most recent balance sheet that Kokuyo Camlin had liabilities of ₹1.57b falling due within a year, and liabilities of ₹272.3m due beyond that. Offsetting these obligations, it had cash of ₹129.4m as well as receivables valued at ₹459.4m due within 12 months. So its liabilities total ₹1.25b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Kokuyo Camlin is worth ₹5.62b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 had a loss before interest and tax, and actually shrunk its revenue by 36%, to ₹4.2b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Kokuyo Camlin's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹133m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹184m of cash over the last year. So to be blunt we think it is risky. 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 example, we've discovered 4 warning signs for Kokuyo Camlin (2 can't be ignored!) that you should be aware of before investing here.

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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