Would Indian Terrain Fashions (NSE:INDTERRAIN) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Indian Terrain Fashions Limited (NSE:INDTERRAIN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Indian Terrain Fashions's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Indian Terrain Fashions had debt of ₹474.0m, up from ₹306.9m in one year. On the flip side, it has ₹113.6m in cash leading to net debt of about ₹360.4m.

How Healthy Is Indian Terrain Fashions's Balance Sheet?

According to the last reported balance sheet, Indian Terrain Fashions had liabilities of ₹1.75b due within 12 months, and liabilities of ₹775.8m due beyond 12 months. On the other hand, it had cash of ₹113.6m and ₹2.29b worth of receivables due within a year. So its liabilities total ₹118.8m more than the combination of its cash and short-term receivables.

Of course, Indian Terrain Fashions has a market capitalization of ₹1.31b, 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 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 Terrain Fashions had a loss before interest and tax, and actually shrunk its revenue by 46%, to ₹2.2b. 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. Indeed, it lost a very considerable ₹553m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹8.1m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For example, we've discovered 2 warning signs for Indian Terrain Fashions (1 is concerning!) that you should be aware of before investing here.

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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