Is Super Spinning Mills (NSE:SUPERSPIN) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Super Spinning Mills Limited (NSE:SUPERSPIN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Super Spinning Mills

What Is Super Spinning Mills's Debt?

You can click the graphic below for the historical numbers, but it shows that Super Spinning Mills had ₹307.2m of debt in March 2021, down from ₹365.5m, one year before. However, because it has a cash reserve of ₹17.7m, its net debt is less, at about ₹289.5m.

How Healthy Is Super Spinning Mills' Balance Sheet?

The latest balance sheet data shows that Super Spinning Mills had liabilities of ₹521.0m due within a year, and liabilities of ₹264.5m falling due after that. Offsetting these obligations, it had cash of ₹17.7m as well as receivables valued at ₹11.5m due within 12 months. So its liabilities total ₹756.3m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹501.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Super Spinning Mills 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 Super Spinning Mills will need earnings to service that debt. 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 Super Spinning Mills had a loss before interest and tax, and actually shrunk its revenue by 66%, to ₹489m. To be frank that doesn't bode well.

Caveat Emptor

While Super Spinning 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 ₹22m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous 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 ₹24m. 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. For example Super Spinning Mills has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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