Does Zodiac Clothing (NSE:ZODIACLOTH) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Zodiac Clothing Company Limited (NSE:ZODIACLOTH) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Zodiac Clothing

How Much Debt Does Zodiac Clothing Carry?

As you can see below, Zodiac Clothing had ₹437.4m of debt at March 2021, down from ₹605.0m a year prior. However, because it has a cash reserve of ₹252.0m, its net debt is less, at about ₹185.4m.

How Healthy Is Zodiac Clothing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zodiac Clothing had liabilities of ₹837.9m due within 12 months and liabilities of ₹450.7m due beyond that. On the other hand, it had cash of ₹252.0m and ₹344.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹692.4m.

This deficit isn't so bad because Zodiac Clothing is worth ₹3.35b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zodiac Clothing will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Zodiac Clothing made a loss at the EBIT level, and saw its revenue drop to ₹1.0b, which is a fall of 48%. That makes us nervous, to say the least.

Caveat Emptor

While Zodiac 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. Indeed, it lost a very considerable ₹481m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹101m of cash over the last year. So suffice it to say we do consider the stock to be 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. Case in point: We've spotted 4 warning signs for Zodiac Clothing you should be aware of, and 1 of them is a bit concerning.

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. 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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