TAKE Solutions (NSE:TAKE) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that TAKE Solutions Limited (NSE:TAKE) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out our latest analysis for TAKE Solutions

What Is TAKE Solutions's Net Debt?

As you can see below, TAKE Solutions had ₹4.50b of debt at March 2021, down from ₹5.53b a year prior. However, because it has a cash reserve of ₹1.72b, its net debt is less, at about ₹2.78b.

How Healthy Is TAKE Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TAKE Solutions had liabilities of ₹5.24b due within 12 months and liabilities of ₹1.96b due beyond that. Offsetting these obligations, it had cash of ₹1.72b as well as receivables valued at ₹4.90b due within 12 months. So it has liabilities totalling ₹585.5m more than its cash and near-term receivables, combined.

Given TAKE Solutions has a market capitalization of ₹9.21b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since TAKE Solutions will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, TAKE Solutions made a loss at the EBIT level, and saw its revenue drop to ₹7.7b, which is a fall of 65%. That makes us nervous, to say the least.

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 ₹1.9b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹4.5b into a profit. In the meantime, we consider the stock very 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. For instance, we've identified 3 warning signs for TAKE Solutions (1 can't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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