Is Indian Card Clothing (NSE:INDIANCARD) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that The Indian Card Clothing Company Limited (NSE:INDIANCARD) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. 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 Indian Card Clothing

How Much Debt Does Indian Card Clothing Carry?

As you can see below, Indian Card Clothing had ₹189.0m of debt at September 2021, down from ₹223.0m a year prior. But it also has ₹273.8m in cash to offset that, meaning it has ₹84.8m net cash.

How Strong Is Indian Card Clothing's Balance Sheet?

We can see from the most recent balance sheet that Indian Card Clothing had liabilities of ₹150.5m falling due within a year, and liabilities of ₹208.7m due beyond that. Offsetting this, it had ₹273.8m in cash and ₹115.2m in receivables that were due within 12 months. So it actually has ₹29.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Indian Card Clothing could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Indian Card Clothing has more cash than debt is arguably a good indication that 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 Indian Card Clothing 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 Indian Card Clothing wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to ₹641m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Indian Card Clothing?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Indian Card Clothing lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₹119m and booked a ₹6.0m accounting loss. Given it only has net cash of ₹84.8m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Indian Card Clothing may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Indian Card Clothing , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.