We Think Zodiac Clothing (NSE:ZODIACLOTH) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Zodiac Clothing Company Limited (NSE:ZODIACLOTH) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zodiac Clothing

What Is Zodiac Clothing's Net Debt?

As you can see below, Zodiac Clothing had ₹754.3m of debt at September 2023, down from ₹863.1m a year prior. However, it does have ₹361.6m in cash offsetting this, leading to net debt of about ₹392.7m.

How Strong Is Zodiac Clothing's Balance Sheet?

The latest balance sheet data shows that Zodiac Clothing had liabilities of ₹845.3m due within a year, and liabilities of ₹323.0m falling due after that. Offsetting these obligations, it had cash of ₹361.6m as well as receivables valued at ₹218.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹588.0m.

This deficit isn't so bad because Zodiac Clothing is worth ₹2.76b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zodiac Clothing's earnings that will influence how the balance sheet holds up in the future. 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 ₹1.4b, which is a fall of 16%. That's not what we would hope to see.

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 ₹297m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹113m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Zodiac Clothing 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.