Is Sutlej Textiles and Industries (NSE:SUTLEJTEX) Weighed On By Its Debt Load?

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.' 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 Sutlej Textiles and Industries Limited (NSE:SUTLEJTEX) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its 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 ₹6.80b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of ₹653.4m, its net debt is less, at about ₹6.15b.

A Look At Sutlej Textiles and Industries's Liabilities

According to the last reported balance sheet, Sutlej Textiles and Industries had liabilities of ₹5.46b due within 12 months, and liabilities of ₹5.12b due beyond 12 months. Offsetting these obligations, it had cash of ₹653.4m as well as receivables valued at ₹2.19b due within 12 months. So it has liabilities totalling ₹7.74b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₹7.51b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sutlej Textiles and Industries'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.

In the last year Sutlej Textiles and Industries had a loss before interest and tax, and actually shrunk its revenue by 31%, to ₹18b. That makes us nervous, to say the least.

Caveat Emptor

While Sutlej Textiles and Industries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹222m at the EBIT level. 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 burned through ₹137m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Sutlej Textiles and Industries (1 is a bit unpleasant) 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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