Is Enterprises (NSE:PTL) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that PTL Enterprises Limited (NSE:PTL) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Enterprises

How Much Debt Does Enterprises Carry?

As you can see below, at the end of March 2021, Enterprises had ₹449.5m of debt, up from none a year ago. Click the image for more detail. But it also has ₹515.1m in cash to offset that, meaning it has ₹65.7m net cash.

A Look At Enterprises' Liabilities

We can see from the most recent balance sheet that Enterprises had liabilities of ₹229.1m falling due within a year, and liabilities of ₹2.40b due beyond that. Offsetting these obligations, it had cash of ₹515.1m as well as receivables valued at ₹4.94m due within 12 months. So its liabilities total ₹2.11b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹2.66b, so it does suggest shareholders should keep an eye on Enterprises' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Enterprises grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Enterprises's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Enterprises may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Enterprises produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although Enterprises's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹65.7m. So we are not troubled with Enterprises's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Enterprises is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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