Is Super Spinning Mills (NSE:SUPERSPIN) Using Too Much 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 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. As with many other companies Super Spinning Mills Limited (NSE:SUPERSPIN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Super Spinning Mills

How Much Debt Does Super Spinning Mills Carry?

As you can see below, at the end of March 2023, Super Spinning Mills had ₹410.8m of debt, up from ₹355.0m a year ago. Click the image for more detail. However, it does have ₹29.8m in cash offsetting this, leading to net debt of about ₹381.0m.

How Strong Is Super Spinning Mills' Balance Sheet?

We can see from the most recent balance sheet that Super Spinning Mills had liabilities of ₹457.8m falling due within a year, and liabilities of ₹270.1m due beyond that. Offsetting these obligations, it had cash of ₹29.8m as well as receivables valued at ₹71.2m due within 12 months. So its liabilities total ₹626.9m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₹484.0m, we think shareholders really should watch Super Spinning Mills's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Super Spinning Mills's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Super Spinning Mills made a loss at the EBIT level, and saw its revenue drop to ₹700m, which is a fall of 32%. 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 ₹114m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₹103m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Super Spinning Mills (including 2 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.