David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that SORIL Infra Resources Limited (NSE:SORILINFRA) does use debt in its business. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is SORIL Infra Resources's Debt?
As you can see below, SORIL Infra Resources had ₹3.40b of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of ₹257.2m, its net debt is less, at about ₹3.14b.
How Healthy Is SORIL Infra Resources' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SORIL Infra Resources had liabilities of ₹3.42b due within 12 months and liabilities of ₹660.3m due beyond that. Offsetting these obligations, it had cash of ₹257.2m as well as receivables valued at ₹4.24b due within 12 months. So it can boast ₹418.5m more liquid assets than total liabilities.
This short term liquidity is a sign that SORIL Infra Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SORIL Infra Resources will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, SORIL Infra Resources made a loss at the EBIT level, and saw its revenue drop to ₹1.6b, which is a fall of 12%. That's not what we would hope to see.
While SORIL Infra Resources's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹85m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And on top of that, it booked free cash flow of ₹706m and profit of ₹69m over the last year. This one is a bit too risky for our liking. 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 SORIL Infra Resources is showing 4 warning signs in our investment analysis , and 1 of those can't be ignored...
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.
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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