Is Indian Card Clothing (NSE:INDIANCARD) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that The Indian Card Clothing Company Limited (NSE:INDIANCARD) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Indian Card Clothing

What Is Indian Card Clothing's Net Debt?

As you can see below, Indian Card Clothing had ₹210.5m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has ₹908.7m in cash to offset that, meaning it has ₹698.2m net cash.

How Healthy Is Indian Card Clothing's Balance Sheet?

We can see from the most recent balance sheet that Indian Card Clothing had liabilities of ₹179.2m falling due within a year, and liabilities of ₹270.2m due beyond that. Offsetting these obligations, it had cash of ₹908.7m as well as receivables valued at ₹153.4m due within 12 months. So it actually has ₹612.6m more liquid assets than total liabilities.

This surplus strongly suggests that Indian Card Clothing has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Indian Card Clothing boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Indian Card Clothing had a loss before interest and tax, and actually shrunk its revenue by 9.5%, to ₹627m. That's not what we would hope to see.

So How Risky Is Indian Card Clothing?

Although Indian Card Clothing had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₹111m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example - Indian Card Clothing has 4 warning signs we think you should be aware of.

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.