We Think Zodiac Clothing (NSE:ZODIACLOTH) Has A Fair Chunk Of 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.' 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. As with many other companies Zodiac Clothing Company Limited (NSE:ZODIACLOTH) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Zodiac Clothing

How Much Debt Does Zodiac Clothing Carry?

As you can see below, Zodiac Clothing had ₹411.9m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₹92.5m in cash leading to net debt of about ₹319.4m.

How Strong Is Zodiac Clothing's Balance Sheet?

We can see from the most recent balance sheet that Zodiac Clothing had liabilities of ₹960.9m falling due within a year, and liabilities of ₹394.6m due beyond that. Offsetting these obligations, it had cash of ₹92.5m as well as receivables valued at ₹234.4m due within 12 months. So its liabilities total ₹1.03b more than the combination of its cash and short-term receivables.

Zodiac Clothing has a market capitalization of ₹2.65b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Zodiac Clothing reported revenue of ₹1.6b, which is a gain of 6.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Zodiac Clothing had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₹390m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹298m of cash over the last year. So suffice it to say we consider the stock very 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 2 warning signs for Zodiac Clothing you should be aware of, and 1 of them is a bit concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.