Does Siyaram Silk Mills (NSE:SIYSIL) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Siyaram Silk Mills Limited (NSE:SIYSIL) does carry 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Siyaram Silk Mills

What Is Siyaram Silk Mills's Net Debt?

The image below, which you can click on for greater detail, shows that Siyaram Silk Mills had debt of ₹1.15b at the end of March 2021, a reduction from ₹3.84b over a year. On the flip side, it has ₹252.7m in cash leading to net debt of about ₹892.7m.

How Healthy Is Siyaram Silk Mills' Balance Sheet?

The latest balance sheet data shows that Siyaram Silk Mills had liabilities of ₹2.93b due within a year, and liabilities of ₹1.50b falling due after that. Offsetting these obligations, it had cash of ₹252.7m as well as receivables valued at ₹3.30b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹881.6m.

Since publicly traded Siyaram Silk Mills shares are worth a total of ₹16.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Siyaram Silk Mills's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Siyaram Silk Mills made a loss at the EBIT level, and saw its revenue drop to ₹11b, which is a fall of 36%. That makes us nervous, to say the least.

Caveat Emptor

While Siyaram Silk Mills's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹16m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₹3.1b and the profit of ₹36m. So one might argue that there's still a chance it can get things on the right track. 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. For instance, we've identified 4 warning signs for Siyaram Silk Mills that 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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