We Think Speciality Restaurants (NSE:SPECIALITY) Has A Fair Chunk Of 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, Speciality Restaurants Limited (NSE:SPECIALITY) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Speciality Restaurants

What Is Speciality Restaurants's Debt?

The image below, which you can click on for greater detail, shows that Speciality Restaurants had debt of ₹1.22b at the end of March 2021, a reduction from ₹1.28b over a year. On the flip side, it has ₹718.7m in cash leading to net debt of about ₹503.4m.

How Strong Is Speciality Restaurants' Balance Sheet?

We can see from the most recent balance sheet that Speciality Restaurants had liabilities of ₹688.6m falling due within a year, and liabilities of ₹1.28b due beyond that. Offsetting this, it had ₹718.7m in cash and ₹144.8m in receivables that were due within 12 months. So its liabilities total ₹1.11b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Speciality Restaurants is worth ₹3.61b, and thus could probably raise enough capital to shore up 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 Speciality Restaurants 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, Speciality Restaurants made a loss at the EBIT level, and saw its revenue drop to ₹1.7b, which is a fall of 38%. To be frank that doesn't bode well.

Caveat Emptor

While Speciality Restaurants'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 ₹213m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹182m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Speciality Restaurants 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.
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