Is TCNS Clothing (NSE:TCNSBRANDS) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that TCNS Clothing Co. Limited (NSE:TCNSBRANDS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TCNS Clothing

What Is TCNS Clothing's Net Debt?

As you can see below, TCNS Clothing had ₹3.30b of debt at March 2021, down from ₹3.62b a year prior. However, because it has a cash reserve of ₹1.87b, its net debt is less, at about ₹1.43b.

A Look At TCNS Clothing's Liabilities

The latest balance sheet data shows that TCNS Clothing had liabilities of ₹1.81b due within a year, and liabilities of ₹2.81b falling due after that. On the other hand, it had cash of ₹1.87b and ₹1.89b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹863.3m.

Of course, TCNS Clothing has a market capitalization of ₹41.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year TCNS Clothing had a loss before interest and tax, and actually shrunk its revenue by 23%, to ₹7.0b. That makes us nervous, to say the least.

Caveat Emptor

While TCNS Clothing's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹894m. 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 ₹471m. So we do think this stock is quite risky. 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 - TCNS Clothing has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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