Ashima (NSE:ASHIMASYN) Has Debt But No Earnings; Should You Worry?

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. Importantly, Ashima Limited (NSE:ASHIMASYN) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ashima

What Is Ashima's Net Debt?

The chart below, which you can click on for greater detail, shows that Ashima had ₹206.1m in debt in September 2021; about the same as the year before. But on the other hand it also has ₹363.4m in cash, leading to a ₹157.3m net cash position.

A Look At Ashima's Liabilities

Zooming in on the latest balance sheet data, we can see that Ashima had liabilities of ₹616.5m due within 12 months and liabilities of ₹172.9m due beyond that. On the other hand, it had cash of ₹363.4m and ₹203.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹222.4m.

Of course, Ashima has a market capitalization of ₹3.60b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Ashima boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ashima 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.

Over 12 months, Ashima made a loss at the EBIT level, and saw its revenue drop to ₹1.8b, which is a fall of 3.2%. That's not what we would hope to see.

So How Risky Is Ashima?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Ashima had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₹246m of cash and made a loss of ₹108m. Given it only has net cash of ₹157.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 Ashima is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.