Is Zuari Industries (NSE:ZUARIIND) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Zuari Industries Limited (NSE:ZUARIIND) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zuari Industries

What Is Zuari Industries's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Zuari Industries had debt of ₹24.4b, up from ₹20.0b in one year. However, it does have ₹3.39b in cash offsetting this, leading to net debt of about ₹21.0b.

How Strong Is Zuari Industries' Balance Sheet?

According to the last reported balance sheet, Zuari Industries had liabilities of ₹14.3b due within 12 months, and liabilities of ₹18.6b due beyond 12 months. On the other hand, it had cash of ₹3.39b and ₹1.57b worth of receivables due within a year. So it has liabilities totalling ₹27.9b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹5.49b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Zuari Industries would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zuari Industries will need earnings to service that debt. 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, Zuari Industries made a loss at the EBIT level, and saw its revenue drop to ₹7.6b, which is a fall of 8.3%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Zuari Industries produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹175m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. However, we note that trailing twelve month EBIT is worse than the free cash flow of ₹407m and the profit of ₹2.5b. So there is arguably potential that the company is going to turn things around. 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. For instance, we've identified 4 warning signs for Zuari Industries (2 are concerning) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.