K.C.P. Sugar and Industries (NSE:KCPSUGIND) Is Carrying A Fair Bit Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at 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 image below, which you can click on for greater detail, shows that K.C.P. Sugar and Industries had debt of ₹1.88b at the end of September 2020, a reduction from ₹2.51b over a year. However, because it has a cash reserve of ₹1.24b, its net debt is less, at about ₹638.5m.

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

The latest balance sheet data shows that K.C.P. Sugar and Industries had liabilities of ₹2.05b due within a year, and liabilities of ₹739.4m falling due after that. Offsetting this, it had ₹1.24b in cash and ₹295.6m in receivables that were due within 12 months. So it has liabilities totalling ₹1.25b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹1.85b, so it does suggest shareholders should keep an eye on K.C.P. Sugar and Industries's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is K.C.P. Sugar and Industries'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.

In the last year K.C.P. Sugar and Industries had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₹3.5b. We would much prefer see growth.

Caveat Emptor

Not only did K.C.P. Sugar and Industries's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹30m 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. For example, we would not want to see a repeat of last year's loss of ₹102m. In the meantime, we consider the stock very 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 learn about the 4 warning signs we've spotted with K.C.P. Sugar and Industries (including 1 which is doesn't sit too well with us) .

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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