Mohota Industries (NSE:MOHOTAIND) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Mohota Industries Limited (NSE:MOHOTAIND) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Mohota Industries

What Is Mohota Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Mohota Industries had ₹790.6m of debt, an increase on ₹691.8m, over one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Mohota Industries's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mohota Industries had liabilities of ₹1.10b due within 12 months and liabilities of ₹181.3m due beyond that. On the other hand, it had cash of ₹2.70m and ₹584.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹690.2m.

This deficit casts a shadow over the ₹191.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Mohota 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 Mohota 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, Mohota Industries made a loss at the EBIT level, and saw its revenue drop to ₹368m, which is a fall of 85%. That makes us nervous, to say the least.

Caveat Emptor

While Mohota Industries'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 ₹230m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₹17m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Mohota Industries (at least 3 which don't sit too well with us) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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