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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that TTK Prestige Limited (NSE:TTKPRESTIG) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for TTK Prestige

How Much Debt Does TTK Prestige Carry?

As you can see below, TTK Prestige had ₹888.7m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has ₹6.41b in cash to offset that, meaning it has ₹5.53b net cash.

A Look At TTK Prestige's Liabilities

According to the last reported balance sheet, TTK Prestige had liabilities of ₹5.87b due within 12 months, and liabilities of ₹1.20b due beyond 12 months. Offsetting this, it had ₹6.41b in cash and ₹4.50b in receivables that were due within 12 months. So it can boast ₹3.84b 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!

But the bad news is that TTK Prestige has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, TTK Prestige's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TTK Prestige has net cash of ₹5.53b, as well as more liquid assets than liabilities. So we don't have any problem with TTK Prestige's use of debt. 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. Be aware that TTK Prestige is showing 1 warning sign in our investment analysis , 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.