Is Sutlej Textiles and Industries (NSE:SUTLEJTEX) A Risky Investment?

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.' 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. We can see that Sutlej Textiles and Industries Limited (NSE:SUTLEJTEX) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Sutlej Textiles and Industries

What Is Sutlej Textiles and Industries's Net Debt?

The chart below, which you can click on for greater detail, shows that Sutlej Textiles and Industries had ₹8.23b in debt in September 2024; about the same as the year before. However, it also had ₹333.5m in cash, and so its net debt is ₹7.90b.

A Look At Sutlej Textiles and Industries' Liabilities

We can see from the most recent balance sheet that Sutlej Textiles and Industries had liabilities of ₹7.73b falling due within a year, and liabilities of ₹3.48b due beyond that. On the other hand, it had cash of ₹333.5m and ₹3.87b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹7.01b.

Sutlej Textiles and Industries has a market capitalization of ₹12.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Sutlej Textiles and Industries'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.

In the last year Sutlej Textiles and Industries had a loss before interest and tax, and actually shrunk its revenue by 8.4%, to ₹26b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Sutlej Textiles and Industries produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₹840m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹858m. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Sutlej Textiles and Industries you should know about.

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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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.