Is Som Distilleries & Breweries (NSE:SDBL) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Som Distilleries & Breweries Limited (NSE:SDBL) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Som Distilleries & Breweries's Debt?

The image below, which you can click on for greater detail, shows that Som Distilleries & Breweries had debt of ₹1.69b at the end of September 2021, a reduction from ₹1.88b over a year. However, it does have ₹116.4m in cash offsetting this, leading to net debt of about ₹1.57b.

How Strong Is Som Distilleries & Breweries' Balance Sheet?

According to the last reported balance sheet, Som Distilleries & Breweries had liabilities of ₹2.58b due within 12 months, and liabilities of ₹1.27b due beyond 12 months. On the other hand, it had cash of ₹116.4m and ₹907.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.82b.

Given this deficit is actually higher than the company's market capitalization of ₹2.33b, we think shareholders really should watch Som Distilleries & Breweries'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 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 reported revenue of ₹3.2b, which is a gain of 7.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Som Distilleries & Breweries produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₹88m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of ₹224m. In the meantime, we consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Som Distilleries & Breweries (of which 1 can't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.