Is Asahi Songwon Colors (NSE:ASAHISONG) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Asahi Songwon Colors Limited (NSE:ASAHISONG) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Asahi Songwon Colors

What Is Asahi Songwon Colors's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Asahi Songwon Colors had debt of ₹1.80b, up from ₹874.6m in one year. However, it also had ₹88.7m in cash, and so its net debt is ₹1.71b.

How Strong Is Asahi Songwon Colors' Balance Sheet?

We can see from the most recent balance sheet that Asahi Songwon Colors had liabilities of ₹2.11b falling due within a year, and liabilities of ₹757.7m due beyond that. On the other hand, it had cash of ₹88.7m and ₹1.07b worth of receivables due within a year. So its liabilities total ₹1.70b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Asahi Songwon Colors is worth ₹3.07b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Asahi Songwon Colors'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.

In the last year Asahi Songwon Colors had a loss before interest and tax, and actually shrunk its revenue by 6.6%, to ₹4.5b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Asahi Songwon Colors produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₹161m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹15m in negative free cash flow over the last twelve months. So to be blunt we think it is 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 example, we've discovered 3 warning signs for Asahi Songwon Colors (2 don't sit too well with us!) 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. 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.