Here's Why Indian Terrain Fashions (NSE:INDTERRAIN) Can Afford Some Debt

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. Importantly, Indian Terrain Fashions Limited (NSE:INDTERRAIN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Indian Terrain Fashions

What Is Indian Terrain Fashions's Debt?

As you can see below, Indian Terrain Fashions had ₹474.0m of debt at September 2020, down from ₹1.09b a year prior. However, because it has a cash reserve of ₹113.6m, its net debt is less, at about ₹360.4m.

A Look At Indian Terrain Fashions' Liabilities

The latest balance sheet data shows that Indian Terrain Fashions had liabilities of ₹1.75b due within a year, and liabilities of ₹775.8m falling due after that. Offsetting these obligations, it had cash of ₹113.6m as well as receivables valued at ₹2.29b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹118.8m.

Of course, Indian Terrain Fashions has a market capitalization of ₹1.23b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Terrain Fashions 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, Indian Terrain Fashions made a loss at the EBIT level, and saw its revenue drop to ₹2.0b, which is a fall of 51%. To be frank that doesn't bode well.

Caveat Emptor

While Indian Terrain Fashions's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹667m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹8.1m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Indian Terrain Fashions (including 1 which is concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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