Is Nandan Denim (NSE:NDL) Using Debt In A Risky Way?

Warren Buffett famously said, '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. As with many other companies Nandan Denim Limited (NSE:NDL) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Nandan Denim

What Is Nandan Denim's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Nandan Denim had debt of ₹5.00b, up from ₹4.49b in one year. However, because it has a cash reserve of ₹1.43b, its net debt is less, at about ₹3.57b.

How Strong Is Nandan Denim's Balance Sheet?

According to the last reported balance sheet, Nandan Denim had liabilities of ₹5.10b due within 12 months, and liabilities of ₹2.62b due beyond 12 months. On the other hand, it had cash of ₹1.43b and ₹3.75b worth of receivables due within a year. So it has liabilities totalling ₹2.55b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹1.55b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Nandan Denim would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nandan Denim 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.

Over 12 months, Nandan Denim made a loss at the EBIT level, and saw its revenue drop to ₹10b, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

While Nandan Denim'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 ₹351m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₹416m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Nandan Denim you should be aware of, and 2 of them make us uncomfortable.

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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