We Think K.C.P. Sugar and Industries (NSE:KCPSUGIND) Has A Fair Chunk Of Debt

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.' 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. Importantly, K.C.P. Sugar and Industries Corporation Limited (NSE:KCPSUGIND) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is K.C.P. Sugar and Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that K.C.P. Sugar and Industries had ₹2.40b of debt in March 2021, down from ₹2.65b, one year before. However, it does have ₹1.02b in cash offsetting this, leading to net debt of about ₹1.38b.

A Look At K.C.P. Sugar and Industries' Liabilities

We can see from the most recent balance sheet that K.C.P. Sugar and Industries had liabilities of ₹2.27b falling due within a year, and liabilities of ₹1.03b due beyond that. On the other hand, it had cash of ₹1.02b and ₹463.0m worth of receivables due within a year. So its liabilities total ₹1.82b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since K.C.P. Sugar and Industries has a market capitalization of ₹3.16b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 17%, to ₹3.3b. We would much prefer see growth.

Caveat Emptor

While K.C.P. Sugar and Industries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹62m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₹6.6m and the profit of ₹233m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for K.C.P. Sugar and Industries you should be aware of, and 2 of them are a bit unpleasant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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