Health Check: How Prudently Does Nahar Industrial Enterprises (NSE:NAHARINDUS) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Nahar Industrial Enterprises Limited (NSE:NAHARINDUS) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nahar Industrial Enterprises

What Is Nahar Industrial Enterprises's Debt?

The image below, which you can click on for greater detail, shows that Nahar Industrial Enterprises had debt of ₹4.37b at the end of September 2020, a reduction from ₹7.07b over a year. However, it also had ₹353.9m in cash, and so its net debt is ₹4.01b.

A Look At Nahar Industrial Enterprises's Liabilities

We can see from the most recent balance sheet that Nahar Industrial Enterprises had liabilities of ₹5.41b falling due within a year, and liabilities of ₹1.49b due beyond that. On the other hand, it had cash of ₹353.9m and ₹1.84b worth of receivables due within a year. So it has liabilities totalling ₹4.70b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹1.02b 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 definitely think shareholders need to watch this one closely. At the end of the day, Nahar Industrial Enterprises would probably need a major re-capitalization if its creditors were to demand repayment. 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 Nahar Industrial Enterprises will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Nahar Industrial Enterprises had a loss before interest and tax, and actually shrunk its revenue by 22%, to ₹13b. To be frank that doesn't bode well.

Caveat Emptor

While Nahar Industrial Enterprises's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹24m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹534m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Nahar Industrial Enterprises (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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