K.C.P. Sugar and Industries (NSE:KCPSUGIND) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that K.C.P. Sugar and Industries Corporation Limited (NSE:KCPSUGIND) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for K.C.P. Sugar and Industries

How Much Debt Does K.C.P. Sugar and Industries Carry?

The chart below, which you can click on for greater detail, shows that K.C.P. Sugar and Industries had ₹2.26b in debt in March 2020; about the same as the year before. However, it does have ₹1.06b in cash offsetting this, leading to net debt of about ₹1.20b.

How Strong Is K.C.P. Sugar and Industries's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that K.C.P. Sugar and Industries had liabilities of ₹2.99b due within 12 months and liabilities of ₹873.5m due beyond that. On the other hand, it had cash of ₹1.06b and ₹371.2m worth of receivables due within a year. So its liabilities total ₹2.4b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₹1.80b, we think shareholders really should watch K.C.P. Sugar and Industries's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is K.C.P. Sugar and Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year K.C.P. Sugar and Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to ₹3.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, K.C.P. Sugar and Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹90.8m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of ₹1.8m and free cash flow of ₹240m. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - K.C.P. Sugar and Industries has 4 warning signs (and 1 which is significant) we think 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. 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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