Is Aarvee Denims and Exports (NSE:AARVEEDEN) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Aarvee Denims and Exports Ltd (NSE:AARVEEDEN) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Aarvee Denims and Exports

How Much Debt Does Aarvee Denims and Exports Carry?

The chart below, which you can click on for greater detail, shows that Aarvee Denims and Exports had ₹4.16b in debt in March 2022; about the same as the year before. However, because it has a cash reserve of ₹163.1m, its net debt is less, at about ₹3.99b.

How Healthy Is Aarvee Denims and Exports' Balance Sheet?

The latest balance sheet data shows that Aarvee Denims and Exports had liabilities of ₹3.44b due within a year, and liabilities of ₹1.59b falling due after that. Offsetting these obligations, it had cash of ₹163.1m as well as receivables valued at ₹1.66b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.20b.

The deficiency here weighs heavily on the ₹468.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Aarvee Denims and Exports would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Aarvee Denims and Exports will need earnings to service that debt. 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.

In the last year Aarvee Denims and Exports wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to ₹4.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Aarvee Denims and Exports still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₹358m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹625m in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Aarvee Denims and Exports (of which 2 are a bit unpleasant!) 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. 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.