Does Indian Terrain Fashions (NSE:INDTERRAIN) Have A Healthy Balance Sheet?

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

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Indian Terrain Fashions

How Much Debt Does Indian Terrain Fashions Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Indian Terrain Fashions had ₹499.7m of debt, an increase on ₹447.4m, over one year. However, because it has a cash reserve of ₹226.5m, its net debt is less, at about ₹273.2m.

How Strong Is Indian Terrain Fashions' Balance Sheet?

The latest balance sheet data shows that Indian Terrain Fashions had liabilities of ₹2.05b due within a year, and liabilities of ₹711.3m falling due after that. Offsetting these obligations, it had cash of ₹226.5m as well as receivables valued at ₹2.26b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹272.3m.

Since publicly traded Indian Terrain Fashions shares are worth a total of ₹1.78b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Indian Terrain Fashions has a very low debt to EBITDA ratio of 1.0 so it is strange to see weak interest coverage, with last year's EBIT being only 0.20 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. We also note that Indian Terrain Fashions improved its EBIT from a last year's loss to a positive ₹37m. There's no doubt that we learn most about debt from the balance sheet. But it is Indian Terrain Fashions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, Indian Terrain Fashions actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

The good news is that Indian Terrain Fashions's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its interest cover. All these things considered, it appears that Indian Terrain Fashions can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. Be aware that Indian Terrain Fashions is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.