Is Super Spinning Mills (NSE:SUPERSPIN) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Super Spinning Mills

How Much Debt Does Super Spinning Mills Carry?

You can click the graphic below for the historical numbers, but it shows that Super Spinning Mills had ₹285.4m of debt in December 2020, down from ₹455.2m, one year before. However, it does have ₹20.3m in cash offsetting this, leading to net debt of about ₹265.1m.

How Healthy Is Super Spinning Mills' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Super Spinning Mills had liabilities of ₹910.8m due within 12 months and liabilities of ₹55.3m due beyond that. Offsetting this, it had ₹20.3m in cash and ₹45.5m in receivables that were due within 12 months. So it has liabilities totalling ₹900.2m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹263.5m 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 definitely think shareholders need to watch this one closely. 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 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 ₹542m, which is a fall of 68%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Super Spinning Mills's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹100m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹72m in the last year. So while it's not wise to assume the company will fail, we do think it's 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 1 warning sign 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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