We Think Indian Terrain Fashions (NSE:INDTERRAIN) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Indian Terrain Fashions Limited (NSE:INDTERRAIN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Indian Terrain Fashions

How Much Debt Does Indian Terrain Fashions Carry?

The chart below, which you can click on for greater detail, shows that Indian Terrain Fashions had ₹441.4m in debt in March 2021; about the same as the year before. On the flip side, it has ₹221.5m in cash leading to net debt of about ₹219.9m.

A Look At Indian Terrain Fashions' Liabilities

According to the last reported balance sheet, Indian Terrain Fashions had liabilities of ₹1.83b due within 12 months, and liabilities of ₹836.9m due beyond 12 months. On the other hand, it had cash of ₹221.5m and ₹2.32b worth of receivables due within a year. So its liabilities total ₹131.2m more than the combination of its cash and short-term receivables.

Of course, Indian Terrain Fashions has a market capitalization of ₹1.58b, 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 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.

In the last year Indian Terrain Fashions had a loss before interest and tax, and actually shrunk its revenue by 42%, to ₹2.1b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Indian Terrain Fashions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹420m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of ₹308m into a profit. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Indian Terrain Fashions (of which 1 can't be ignored!) you should know about.

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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