Bajaj Hindusthan Sugar (NSE:BAJAJHIND) Has Debt But No Earnings; Should You Worry?

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. We can see that Bajaj Hindusthan Sugar Limited (NSE:BAJAJHIND) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bajaj Hindusthan Sugar

What Is Bajaj Hindusthan Sugar's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Bajaj Hindusthan Sugar had ₹55.5b of debt in September 2020, down from ₹58.2b, one year before. On the flip side, it has ₹10.6b in cash leading to net debt of about ₹44.9b.

How Strong Is Bajaj Hindusthan Sugar's Balance Sheet?

We can see from the most recent balance sheet that Bajaj Hindusthan Sugar had liabilities of ₹36.9b falling due within a year, and liabilities of ₹57.3b due beyond that. Offsetting this, it had ₹10.6b in cash and ₹12.5b in receivables that were due within 12 months. So its liabilities total ₹71.0b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹7.29b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Bajaj Hindusthan Sugar would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bajaj Hindusthan Sugar 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, Bajaj Hindusthan Sugar made a loss at the EBIT level, and saw its revenue drop to ₹65b, which is a fall of 5.8%. That's not what we would hope to see.

Caveat Emptor

Importantly, Bajaj Hindusthan Sugar had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹449m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹3.0b in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Bajaj Hindusthan Sugar .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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