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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.’ 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. As with many other companies. Kesar Terminals & Infrastructure Limited (NSE:KTIL) makes use of debt. But should shareholders be worried about its use of debt?
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 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Kesar Terminals & Infrastructure’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Kesar Terminals & Infrastructure had ₹17.2m of debt in March 2019, down from ₹120.6m, one year before However, it does have ₹17.7m in cash offsetting this, leading to net cash of ₹559.0k.
How Strong Is Kesar Terminals & Infrastructure’s Balance Sheet?
We can see from the most recent balance sheet that Kesar Terminals & Infrastructure had liabilities of ₹1.37b falling due within a year, and liabilities of ₹80.2m due beyond that. Offsetting these obligations, it had cash of ₹17.7m as well as receivables valued at ₹65.2m due within 12 months. So its liabilities total ₹1.37b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the ₹460.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Kesar Terminals & Infrastructure would likely require a major re-capitalisation if it had to pay its creditors today. Kesar Terminals & Infrastructure boasts net cash, so it’s fair to say it does not have a heavy debt load!
Unfortunately, Kesar Terminals & Infrastructure’s EBIT flopped 13% over the last four quarters. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kesar Terminals & Infrastructure’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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kesar Terminals & Infrastructure may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Kesar Terminals & Infrastructure actually produced more free cash flow than EBIT. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
Although Kesar Terminals & Infrastructure’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹559k. And it impressed us with free cash flow of ₹93m, being 104% of its EBIT. Despite the cash, we do find Kesar Terminals & Infrastructure’s level of total liabilities concerning, so we’re not particularly comfortable with the stock. Even though Kesar Terminals & Infrastructure lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check outhow earnings have been trending over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.