Astron Paper & Board Mill (NSE:ASTRON) Is Carrying A Fair Bit Of Debt

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.' 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 can see that Astron Paper & Board Mill Limited (NSE:ASTRON) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Astron Paper & Board Mill

What Is Astron Paper & Board Mill's Net Debt?

As you can see below, at the end of September 2022, Astron Paper & Board Mill had ₹808.3m of debt, up from ₹715.5m a year ago. Click the image for more detail. On the flip side, it has ₹105.7m in cash leading to net debt of about ₹702.6m.

How Healthy Is Astron Paper & Board Mill's Balance Sheet?

The latest balance sheet data shows that Astron Paper & Board Mill had liabilities of ₹1.49b due within a year, and liabilities of ₹108.1m falling due after that. Offsetting these obligations, it had cash of ₹105.7m as well as receivables valued at ₹986.7m due within 12 months. So it has liabilities totalling ₹501.4m more than its cash and near-term receivables, combined.

Astron Paper & Board Mill has a market capitalization of ₹1.21b, so it could very likely raise cash to ameliorate 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 Astron Paper & Board Mill'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 Astron Paper & Board Mill had a loss before interest and tax, and actually shrunk its revenue by 13%, to ₹4.5b. We would much prefer see growth.

Caveat Emptor

Not only did Astron Paper & Board Mill'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 ₹205m. 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 ₹19m 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Astron Paper & Board Mill (2 make us uncomfortable) 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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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.