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 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. Importantly, Siyaram Silk Mills Limited (NSE:SIYSIL) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Siyaram Silk Mills Carry?
The image below, which you can click on for greater detail, shows that Siyaram Silk Mills had debt of ₹3.51b at the end of September 2020, a reduction from ₹5.26b over a year. However, it also had ₹100.7m in cash, and so its net debt is ₹3.41b.
A Look At Siyaram Silk Mills' Liabilities
Zooming in on the latest balance sheet data, we can see that Siyaram Silk Mills had liabilities of ₹3.79b due within 12 months and liabilities of ₹1.73b due beyond that. On the other hand, it had cash of ₹100.7m and ₹1.71b worth of receivables due within a year. So its liabilities total ₹3.71b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Siyaram Silk Mills has a market capitalization of ₹9.83b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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're focused on the future you can check out this free report showing analyst profit forecasts.
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 41%. That makes us nervous, to say the least.
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. To be specific the EBIT loss came in at ₹134m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹315m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Siyaram Silk Mills you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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