Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Mohit Industries Limited (NSE:MOHITIND) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Mohit Industries Carry?
As you can see below, at the end of September 2021, Mohit Industries had ₹599.9m of debt, up from ₹574.8m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.
A Look At Mohit Industries' Liabilities
We can see from the most recent balance sheet that Mohit Industries had liabilities of ₹612.1m falling due within a year, and liabilities of ₹134.4m due beyond that. Offsetting this, it had ₹9.07m in cash and ₹363.5m in receivables that were due within 12 months. So it has liabilities totalling ₹374.0m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the ₹245.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Mohit Industries would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mohit Industries 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.
Over 12 months, Mohit Industries reported revenue of ₹1.8b, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
While we can certainly appreciate Mohit Industries's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at ₹255k. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₹2.2m and the profit of ₹23m. So one might argue that there's still a chance it can get things on the right track. 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 Mohit Industries is showing 4 warning signs in our investment analysis , and 3 of those are potentially serious...
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.
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.