Siyaram Silk Mills (NSE:SIYSIL) Is Making Moderate Use Of 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. We note that Siyaram Silk Mills Limited (NSE:SIYSIL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Siyaram Silk Mills

How Much Debt Does Siyaram Silk Mills Carry?

You can click the graphic below for the historical numbers, but it shows that Siyaram Silk Mills had ₹3.51b of debt in September 2020, down from ₹4.74b, one year before. However, it also had ₹100.7m in cash, and so its net debt is ₹3.41b.

How Strong Is Siyaram Silk Mills's Balance Sheet?

The latest balance sheet data shows that Siyaram Silk Mills had liabilities of ₹3.79b due within a year, and liabilities of ₹1.73b falling due after 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 ₹8.31b, 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 ultimately the future profitability of the business will decide if Siyaram Silk Mills can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Siyaram Silk Mills had a loss before interest and tax, and actually shrunk its revenue by 40%, to ₹11b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Siyaram Silk Mills's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹334m. 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 ₹514m. In the meantime, we consider the stock very 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. Take risks, for example - Siyaram Silk Mills has 3 warning signs we think you should be aware of.

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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