Stock Analysis

Does Shanti Overseas (India) (NSE:SHANTI) Have A Healthy Balance Sheet?

NSEI:SHANTI
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Shanti Overseas (India) Limited (NSE:SHANTI) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shanti Overseas (India)

How Much Debt Does Shanti Overseas (India) Carry?

You can click the graphic below for the historical numbers, but it shows that Shanti Overseas (India) had ₹176.1m of debt in September 2021, down from ₹320.4m, one year before. However, because it has a cash reserve of ₹15.1m, its net debt is less, at about ₹161.0m.

debt-equity-history-analysis
NSEI:SHANTI Debt to Equity History February 27th 2022

How Healthy Is Shanti Overseas (India)'s Balance Sheet?

The latest balance sheet data shows that Shanti Overseas (India) had liabilities of ₹83.1m due within a year, and liabilities of ₹106.3m falling due after that. On the other hand, it had cash of ₹15.1m and ₹12.0m worth of receivables due within a year. So its liabilities total ₹162.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹195.5m, so it does suggest shareholders should keep an eye on Shanti Overseas (India)'s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanti Overseas (India)'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, Shanti Overseas (India) saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Shanti Overseas (India) produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹4.9m 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 ₹31m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Shanti Overseas (India) (including 2 which are significant) .

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.

Valuation is complex, but we're helping make it simple.

Find out whether Shanti Overseas (India) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.