Is Ashapura Minechem (NSE:ASHAPURMIN) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Ashapura Minechem Limited (NSE:ASHAPURMIN) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Ashapura Minechem

How Much Debt Does Ashapura Minechem Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Ashapura Minechem had debt of ₹5.86b, up from ₹2.67b in one year. However, it also had ₹865.5m in cash, and so its net debt is ₹4.99b.

A Look At Ashapura Minechem's Liabilities

According to the last reported balance sheet, Ashapura Minechem had liabilities of ₹7.63b due within 12 months, and liabilities of ₹8.38b due beyond 12 months. On the other hand, it had cash of ₹865.5m and ₹3.34b worth of receivables due within a year. So its liabilities total ₹11.8b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₹9.67b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Ashapura Minechem'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, Ashapura Minechem reported revenue of ₹6.3b, which is a gain of 47%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Ashapura Minechem managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₹261m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₹514m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Ashapura Minechem (1 is concerning) you should be aware of.

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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