Does Nagreeka Exports (NSE:NAGREEKEXP) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Nagreeka Exports Limited (NSE:NAGREEKEXP) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Nagreeka Exports

What Is Nagreeka Exports's Net Debt?

As you can see below, Nagreeka Exports had ₹1.93b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹48.2m in cash offsetting this, leading to net debt of about ₹1.88b.

A Look At Nagreeka Exports' Liabilities

According to the last reported balance sheet, Nagreeka Exports had liabilities of ₹1.98b due within 12 months, and liabilities of ₹532.9m due beyond 12 months. Offsetting this, it had ₹48.2m in cash and ₹248.8m in receivables that were due within 12 months. So its liabilities total ₹2.21b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹412.5m 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, Nagreeka Exports would probably need a major re-capitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Nagreeka Exports shareholders face the double whammy of a high net debt to EBITDA ratio (25.9), and fairly weak interest coverage, since EBIT is just 0.0028 times the interest expense. This means we'd consider it to have a heavy debt load. Even worse, Nagreeka Exports saw its EBIT tank 100% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. There's no doubt that we learn most about debt from the balance sheet. But it is Nagreeka Exports'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Nagreeka Exports reported free cash flow worth 12% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

On the face of it, Nagreeka Exports's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And even its net debt to EBITDA fails to inspire much confidence. Considering everything we've mentioned above, it's fair to say that Nagreeka Exports is carrying heavy debt load. If you harvest honey without a bee suit, you risk getting stung, so we'd probably stay away from this particular stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Nagreeka Exports you should be aware of, and 3 of them shouldn't be ignored.

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.

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