Is Som Distilleries & Breweries (NSE:SDBL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Som Distilleries & Breweries Limited (NSE:SDBL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

View our latest analysis for Som Distilleries & Breweries

How Much Debt Does Som Distilleries & Breweries Carry?

You can click the graphic below for the historical numbers, but it shows that Som Distilleries & Breweries had ₹1.78b of debt in March 2021, down from ₹2.24b, one year before. However, it does have ₹144.7m in cash offsetting this, leading to net debt of about ₹1.63b.

How Healthy Is Som Distilleries & Breweries' Balance Sheet?

The latest balance sheet data shows that Som Distilleries & Breweries had liabilities of ₹2.96b due within a year, and liabilities of ₹1.33b falling due after that. Offsetting this, it had ₹144.7m in cash and ₹1.33b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.82b.

This is a mountain of leverage relative to its market capitalization of ₹3.13b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Som Distilleries & Breweries'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.

Over 12 months, Som Distilleries & Breweries made a loss at the EBIT level, and saw its revenue drop to ₹2.9b, which is a fall of 37%. That makes us nervous, to say the least.

Caveat Emptor

While Som Distilleries & Breweries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹204m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹381m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Som Distilleries & Breweries (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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