Suryalakshmi Cotton Mills (NSE:SURYALAXMI) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Suryalakshmi Cotton Mills Limited (NSE:SURYALAXMI) makes use of debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Suryalakshmi Cotton Mills

How Much Debt Does Suryalakshmi Cotton Mills Carry?

As you can see below, Suryalakshmi Cotton Mills had ₹2.88b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of ₹727.4m, its net debt is less, at about ₹2.15b.

How Strong Is Suryalakshmi Cotton Mills's Balance Sheet?

We can see from the most recent balance sheet that Suryalakshmi Cotton Mills had liabilities of ₹3.00b falling due within a year, and liabilities of ₹1.58b due beyond that. On the other hand, it had cash of ₹727.4m and ₹1.03b worth of receivables due within a year. So it has liabilities totalling ₹2.82b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹539.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Suryalakshmi Cotton Mills would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Suryalakshmi Cotton Mills's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Suryalakshmi Cotton Mills made a loss at the EBIT level, and saw its revenue drop to ₹4.2b, which is a fall of 39%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Suryalakshmi Cotton Mills's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹48m 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. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹233m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Suryalakshmi Cotton Mills (3 are a bit concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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