Is Aarvee Denims and Exports (NSE:AARVEEDEN) Using Too Much Debt?

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.' 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. Importantly, Aarvee Denims and Exports Limited (NSE:AARVEEDEN) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Aarvee Denims and Exports

What Is Aarvee Denims and Exports's Debt?

The image below, which you can click on for greater detail, shows that Aarvee Denims and Exports had debt of ₹3.78b at the end of September 2021, a reduction from ₹4.12b over a year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Aarvee Denims and Exports' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aarvee Denims and Exports had liabilities of ₹3.44b due within 12 months and liabilities of ₹1.72b due beyond that. Offsetting this, it had ₹65.6m in cash and ₹1.95b in receivables that were due within 12 months. So it has liabilities totalling ₹3.14b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹541.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Aarvee Denims and Exports would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Aarvee Denims and Exports'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.

Over 12 months, Aarvee Denims and Exports reported revenue of ₹4.4b, which is a gain of 54%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Aarvee Denims and Exports's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping ₹337m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹428m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Aarvee Denims and Exports that 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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