Is BPL (NSE:BPL) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies BPL Limited (NSE:BPL) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BPL

How Much Debt Does BPL Carry?

As you can see below, at the end of September 2020, BPL had ₹154.1m of debt, up from ₹126.5m a year ago. Click the image for more detail. However, it does have ₹1.05b in cash offsetting this, leading to net cash of ₹900.5m.

How Strong Is BPL's Balance Sheet?

The latest balance sheet data shows that BPL had liabilities of ₹2.00b due within a year, and liabilities of ₹50.2m falling due after that. Offsetting these obligations, it had cash of ₹1.05b as well as receivables valued at ₹123.2m due within 12 months. So it has liabilities totalling ₹867.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹1.14b, so it does suggest shareholders should keep an eye on BPL's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, BPL also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 BPL 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, BPL made a loss at the EBIT level, and saw its revenue drop to ₹660m, which is a fall of 41%. That makes us nervous, to say the least.

So How Risky Is BPL?

While BPL lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₹68m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for BPL you should know about.

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.

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