Is Yaarii Digital Integrated Services (NSE:YAARII) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Yaarii Digital Integrated Services Limited (NSE:YAARII) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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 Yaarii Digital Integrated Services

How Much Debt Does Yaarii Digital Integrated Services Carry?

As you can see below, Yaarii Digital Integrated Services had ₹3.07b of debt at March 2021, down from ₹11.3b a year prior. However, because it has a cash reserve of ₹1.63b, its net debt is less, at about ₹1.45b.

A Look At Yaarii Digital Integrated Services' Liabilities

Zooming in on the latest balance sheet data, we can see that Yaarii Digital Integrated Services had liabilities of ₹10.4b due within 12 months and liabilities of ₹779.3m due beyond that. Offsetting this, it had ₹1.63b in cash and ₹3.38b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹6.21b.

This deficit is considerable relative to its market capitalization of ₹8.18b, so it does suggest shareholders should keep an eye on Yaarii Digital Integrated Services' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While Yaarii Digital Integrated Services has a quite reasonable net debt to EBITDA multiple of 1.8, its interest cover seems weak, at 0.40. This does suggest the company is paying fairly high interest rates. In any case, it's safe to say the company has meaningful debt. Notably, Yaarii Digital Integrated Services made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹499m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Yaarii Digital Integrated Services'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. 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, Yaarii Digital Integrated Services 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

Yaarii Digital Integrated Services's interest cover and level of total liabilities definitely weigh on it, in our esteem. But the good news is it seems to be able to convert EBIT to free cash flow with ease. Looking at all the angles mentioned above, it does seem to us that Yaarii Digital Integrated Services is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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 Yaarii Digital Integrated Services has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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