Salasar Exteriors And Contour (NSE:SECL) Has A Pretty Healthy Balance Sheet

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. We note that Salasar Exteriors And Contour Limited (NSE:SECL) does have debt on its balance sheet. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Salasar Exteriors And Contour

What Is Salasar Exteriors And Contour's Debt?

As you can see below, Salasar Exteriors And Contour had ₹137.8m of debt at September 2021, down from ₹153.4m a year prior. However, because it has a cash reserve of ₹3.11m, its net debt is less, at about ₹134.7m.

How Healthy Is Salasar Exteriors And Contour's Balance Sheet?

The latest balance sheet data shows that Salasar Exteriors And Contour had liabilities of ₹220.0m due within a year, and liabilities of ₹25.0m falling due after that. On the other hand, it had cash of ₹3.11m and ₹208.7m worth of receivables due within a year. So it has liabilities totalling ₹33.2m more than its cash and near-term receivables, combined.

Since publicly traded Salasar Exteriors And Contour shares are worth a total of ₹380.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.45 times and a disturbingly high net debt to EBITDA ratio of 12.8 hit our confidence in Salasar Exteriors And Contour like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for Salasar Exteriors And Contour is that it turned last year's EBIT loss into a gain of ₹10m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Salasar Exteriors And Contour'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, Salasar Exteriors And Contour actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Salasar Exteriors And Contour's interest cover was a real negative on this analysis, as was its net debt to EBITDA. But its conversion of EBIT to free cash flow was significantly redeeming. Looking at all this data makes us feel a little cautious about Salasar Exteriors And Contour's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. For instance, we've identified 4 warning signs for Salasar Exteriors And Contour (2 are a bit unpleasant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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