Is TTK Prestige (NSE:TTKPRESTIG) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, TTK Prestige Limited (NSE:TTKPRESTIG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for TTK Prestige

What Is TTK Prestige's Net Debt?

The chart below, which you can click on for greater detail, shows that TTK Prestige had ₹835.4m in debt in March 2021; about the same as the year before. However, its balance sheet shows it holds ₹4.96b in cash, so it actually has ₹4.13b net cash.

How Healthy Is TTK Prestige's Balance Sheet?

According to the last reported balance sheet, TTK Prestige had liabilities of ₹4.22b due within 12 months, and liabilities of ₹1.11b due beyond 12 months. Offsetting this, it had ₹4.96b in cash and ₹3.31b in receivables that were due within 12 months. So it actually has ₹2.94b more liquid assets than total liabilities.

This surplus suggests that TTK Prestige has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, TTK Prestige boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that TTK Prestige has boosted its EBIT by 85%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TTK Prestige can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While TTK Prestige has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, TTK Prestige produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that TTK Prestige has net cash of ₹4.13b, as well as more liquid assets than liabilities. And we liked the look of last year's 85% year-on-year EBIT growth. So we don't think TTK Prestige's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for TTK Prestige you should be aware of.

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.

If you’re looking to trade TTK Prestige, 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. Promoted

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.
^*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.