Andhra Paper (NSE:ANDHRAPAP) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Andhra Paper Limited (NSE:ANDHRAPAP) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Andhra Paper

What Is Andhra Paper's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Andhra Paper had debt of ₹243.5m, up from ₹93.3m in one year. However, it does have ₹1.97b in cash offsetting this, leading to net cash of ₹1.73b.

How Healthy Is Andhra Paper's Balance Sheet?

According to the last reported balance sheet, Andhra Paper had liabilities of ₹2.51b due within 12 months, and liabilities of ₹1.06b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.97b as well as receivables valued at ₹1.38b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹229.3m.

Since publicly traded Andhra Paper shares are worth a total of ₹9.23b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Andhra Paper boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Andhra Paper'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 Andhra Paper had a loss before interest and tax, and actually shrunk its revenue by 30%, to ₹8.9b. To be frank that doesn't bode well.

So How Risky Is Andhra Paper?

Although Andhra Paper had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹823m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example, we've discovered 1 warning sign for Andhra Paper that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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