Is Nandan Denim (NSE:NDL) Weighed On By Its Debt Load?

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 Nandan Denim Limited (NSE:NDL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nandan Denim

What Is Nandan Denim's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Nandan Denim had ₹5.00b of debt, an increase on ₹4.49b, over one year. However, it does have ₹1.43b in cash offsetting this, leading to net debt of about ₹3.57b.

How Healthy Is Nandan Denim's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nandan Denim had liabilities of ₹5.10b due within 12 months and liabilities of ₹2.62b due beyond that. Offsetting these obligations, it had cash of ₹1.43b as well as receivables valued at ₹3.75b due within 12 months. So it has liabilities totalling ₹2.55b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹1.17b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Nandan Denim would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Nandan Denim's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Nandan Denim had a loss before interest and tax, and actually shrunk its revenue by 30%, to ₹11b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Nandan Denim's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹199m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of ₹429m. And until that time we think this is a risky stock. 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. For instance, we've identified 4 warning signs for Nandan Denim (2 are a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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