Health Check: How Prudently Does TCNS Clothing (NSE:TCNSBRANDS) Use Debt?

By
Simply Wall St
Published
January 26, 2021
NSEI:TCNSBRANDS

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that TCNS Clothing Co. Limited (NSE:TCNSBRANDS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TCNS Clothing

What Is TCNS Clothing's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 TCNS Clothing had ₹357.1m of debt, an increase on none, over one year. But it also has ₹1.46b in cash to offset that, meaning it has ₹1.10b net cash.

debt-equity-history-analysis
NSEI:TCNSBRANDS Debt to Equity History January 27th 2021

A Look At TCNS Clothing's Liabilities

According to the last reported balance sheet, TCNS Clothing had liabilities of ₹2.17b due within 12 months, and liabilities of ₹2.96b due beyond 12 months. On the other hand, it had cash of ₹1.46b and ₹1.64b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.03b.

Since publicly traded TCNS Clothing shares are worth a total of ₹25.1b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, TCNS Clothing also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TCNS Clothing can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, TCNS Clothing made a loss at the EBIT level, and saw its revenue drop to ₹7.2b, which is a fall of 39%. To be frank that doesn't bode well.

So How Risky Is TCNS Clothing?

While TCNS Clothing lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₹395m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example, we've discovered 2 warning signs for TCNS Clothing that you should be aware of before investing here.

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.

Promoted
If you’re looking to trade TCNS Clothing, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.


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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020


Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.


Simply Wall St character - Warren

Simply Wall St

Simply Wall St is a financial technology startup focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of equity analysts with a public, market-beating track record. Learn more about the team behind Simply Wall St.