We Think Kokuyo Camlin (NSE:KOKUYOCMLN) Has A Fair Chunk Of Debt

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.' 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. Importantly, Kokuyo Camlin Limited (NSE:KOKUYOCMLN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kokuyo Camlin

How Much Debt Does Kokuyo Camlin Carry?

The image below, which you can click on for greater detail, shows that Kokuyo Camlin had debt of ₹1.11b at the end of September 2020, a reduction from ₹1.26b over a year. On the flip side, it has ₹129.4m in cash leading to net debt of about ₹983.1m.

How Strong Is Kokuyo Camlin's Balance Sheet?

According to the last reported balance sheet, Kokuyo Camlin had liabilities of ₹1.57b due within 12 months, and liabilities of ₹272.3m due beyond 12 months. 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.

Since publicly traded Kokuyo Camlin shares are worth a total of ₹6.79b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. 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 30%, to ₹4.6b. 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). To be specific the EBIT loss came in at ₹161m. 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. 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. Be aware that Kokuyo Camlin is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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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