Here's Why TAKE Solutions (NSE:TAKE) Can Afford Some Debt

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 TAKE Solutions Limited (NSE:TAKE) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, 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 TAKE Solutions

What Is TAKE Solutions's Debt?

As you can see below, TAKE Solutions had ₹4.97b of debt at September 2020, down from ₹5.58b a year prior. On the flip side, it has ₹1.61b in cash leading to net debt of about ₹3.37b.

A Look At TAKE Solutions' Liabilities

Zooming in on the latest balance sheet data, we can see that TAKE Solutions had liabilities of ₹6.17b due within 12 months and liabilities of ₹2.21b due beyond that. On the other hand, it had cash of ₹1.61b and ₹5.89b worth of receivables due within a year. So its liabilities total ₹886.4m more than the combination of its cash and short-term receivables.

Of course, TAKE Solutions has a market capitalization of ₹8.23b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is TAKE Solutions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year TAKE Solutions had a loss before interest and tax, and actually shrunk its revenue by 61%, to ₹9.2b. To be frank that doesn't bode well.

Caveat Emptor

Not only did TAKE Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹4.0b. 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. We would feel better if it turned its trailing twelve month loss of ₹5.4b into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for TAKE Solutions (1 doesn't sit too well with us) you should be aware of.

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. 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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