We Think TAKE Solutions (NSE:TAKE) Has A Fair Chunk Of Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies TAKE Solutions Limited (NSE:TAKE) makes use of 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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TAKE Solutions

What Is TAKE Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that TAKE Solutions had debt of ₹332.6m at the end of March 2023, a reduction from ₹585.1m over a year. On the flip side, it has ₹111.7m in cash leading to net debt of about ₹220.8m.

A Look At TAKE Solutions' Liabilities

Zooming in on the latest balance sheet data, we can see that TAKE Solutions had liabilities of ₹1.01b due within 12 months and liabilities of ₹148.7m due beyond that. Offsetting these obligations, it had cash of ₹111.7m as well as receivables valued at ₹541.4m due within 12 months. So its liabilities total ₹504.6m more than the combination of its cash and short-term receivables.

Of course, TAKE Solutions has a market capitalization of ₹2.75b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 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, TAKE Solutions made a loss at the EBIT level, and saw its revenue drop to ₹1.9b, which is a fall of 71%. That makes us nervous, to say the least.

Caveat Emptor

While TAKE Solutions's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹359m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹124m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for TAKE Solutions (1 shouldn't be ignored!) that you should be aware of before investing here.

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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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.