Does Tree House Education & Accessories (NSE:TREEHOUSE) Have A Healthy Balance Sheet?

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.' 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, Tree House Education & Accessories Limited (NSE:TREEHOUSE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tree House Education & Accessories

How Much Debt Does Tree House Education & Accessories Carry?

As you can see below, Tree House Education & Accessories had ₹198.7m of debt at March 2022, down from ₹334.0m a year prior. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Tree House Education & Accessories' Balance Sheet?

According to the last reported balance sheet, Tree House Education & Accessories had liabilities of ₹294.5m due within 12 months, and liabilities of ₹400.0k due beyond 12 months. Offsetting these obligations, it had cash of ₹100.0k as well as receivables valued at ₹250.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹44.0m.

Since publicly traded Tree House Education & Accessories shares are worth a total of ₹576.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tree House Education & Accessories 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.

In the last year Tree House Education & Accessories wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to ₹60m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Tree House Education & Accessories had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹364m 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. Another cause for caution is that is bled ₹288m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 4 warning signs with Tree House Education & Accessories (at least 3 which are significant) , and understanding them should be part of your investment process.

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.