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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Super Spinning Mills Limited (NSE:SUPERSPIN) does use debt in its business. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Super Spinning Mills

What Is Super Spinning Mills's Debt?

The image below, which you can click on for greater detail, shows that Super Spinning Mills had debt of ₹356.8m at the end of March 2020, a reduction from ₹508.5m over a year. On the flip side, it has ₹23.3m in cash leading to net debt of about ₹333.5m.

How Strong Is Super Spinning Mills's Balance Sheet?

According to the last reported balance sheet, Super Spinning Mills had liabilities of ₹1.11b due within 12 months, and liabilities of ₹67.3m due beyond 12 months. Offsetting this, it had ₹23.3m in cash and ₹97.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.1b.

This deficit casts a shadow over the ₹258.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Super Spinning Mills 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 you can't view debt in total isolation; since Super Spinning Mills will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Super Spinning Mills made a loss at the EBIT level, and saw its revenue drop to ₹1.5b, which is a fall of 30%. That makes us nervous, to say the least.

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 a very considerable ₹101.2m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost ₹113.0m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Super Spinning Mills (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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