These 4 Measures Indicate That Astron Paper & Board Mill (NSE:ASTRON) Is Using Debt Extensively

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 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 A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Astron Paper & Board Mill

What Is Astron Paper & Board Mill's Debt?

As you can see below, Astron Paper & Board Mill had ₹577.2m of debt at March 2021, down from ₹729.5m a year prior. However, it also had ₹106.6m in cash, and so its net debt is ₹470.6m.

A Look At Astron Paper & Board Mill's Liabilities

The latest balance sheet data shows that Astron Paper & Board Mill had liabilities of ₹1.24b due within a year, and liabilities of ₹233.0m falling due after that. Offsetting these obligations, it had cash of ₹106.6m as well as receivables valued at ₹913.5m due within 12 months. So it has liabilities totalling ₹454.1m more than its cash and near-term receivables, combined.

Since publicly traded Astron Paper & Board Mill shares are worth a total of ₹2.34b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Given net debt is only 1.5 times EBITDA, it is initially surprising to see that Astron Paper & Board Mill's EBIT has low interest coverage of 2.2 times. So while we're not necessarily alarmed we think that its debt is far from trivial. Unfortunately, Astron Paper & Board Mill's EBIT flopped 18% over the last four quarters. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Astron Paper & Board Mill'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Astron Paper & Board Mill recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Both Astron Paper & Board Mill's EBIT growth rate and its interest cover were discouraging. But its not so bad at managing its debt, based on its EBITDA,. Taking the abovementioned factors together we do think Astron Paper & Board Mill's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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 Astron Paper & Board Mill has 3 warning signs (and 1 which is concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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