Is Super Spinning Mills (NSE:SUPERSPIN) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Super Spinning Mills Limited (NSE:SUPERSPIN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Super Spinning Mills

What Is Super Spinning Mills's Net Debt?

As you can see below, Super Spinning Mills had ₹417.2m of debt at September 2020, down from ₹455.2m a year prior. On the flip side, it has ₹35.6m in cash leading to net debt of about ₹381.7m.

How Strong Is Super Spinning Mills's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Super Spinning Mills had liabilities of ₹957.8m due within 12 months and liabilities of ₹54.8m due beyond that. On the other hand, it had cash of ₹35.6m and ₹12.0m worth of receivables due within a year. So its liabilities total ₹965.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹312.4m 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 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 ₹815m, which is a fall of 55%. 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). Indeed, it lost a very considerable ₹91m at the EBIT level. 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. Nevertheless, we would not bet on it given that it lost ₹143m in just last twelve months, and it doesn't have much by way of liquid assets. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Super Spinning Mills (including 1 which is is a bit concerning) .

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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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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