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.' 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. We can see that Aspinwall and Company Limited (NSE:ASPINWALL) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 Aspinwall
How Much Debt Does Aspinwall Carry?
As you can see below, Aspinwall had ₹139.9m of debt at March 2023, down from ₹208.5m a year prior. However, its balance sheet shows it holds ₹411.6m in cash, so it actually has ₹271.7m net cash.
How Strong Is Aspinwall's Balance Sheet?
According to the last reported balance sheet, Aspinwall had liabilities of ₹620.2m due within 12 months, and liabilities of ₹67.3m due beyond 12 months. Offsetting these obligations, it had cash of ₹411.6m as well as receivables valued at ₹235.6m due within 12 months. So its liabilities total ₹40.3m more than the combination of its cash and short-term receivables.
Given Aspinwall has a market capitalization of ₹1.84b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Aspinwall also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also good is that Aspinwall grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Aspinwall 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Aspinwall 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. Happily for any shareholders, Aspinwall actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Aspinwall has ₹271.7m in net cash. The cherry on top was that in converted 141% of that EBIT to free cash flow, bringing in ₹301m. So is Aspinwall's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Aspinwall you should know about.
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.
About NSEI:ASPINWALL
Aspinwall
A multi-line business organization, engages in coffee processing and trading, rubber plantations, natural fiber, and logistics businesses in India, the Americas, Europe, and internationally.
Excellent balance sheet with proven track record.