These 4 Measures Indicate That Bharat Wire Ropes (NSE:BHARATWIRE) 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.' 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. Importantly, Bharat Wire Ropes Limited (NSE:BHARATWIRE) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bharat Wire Ropes

What Is Bharat Wire Ropes's Debt?

The image below, which you can click on for greater detail, shows that Bharat Wire Ropes had debt of ₹2.74b at the end of March 2021, a reduction from ₹6.74b over a year. However, it also had ₹64.6m in cash, and so its net debt is ₹2.68b.

A Look At Bharat Wire Ropes' Liabilities

According to the last reported balance sheet, Bharat Wire Ropes had liabilities of ₹916.7m due within 12 months, and liabilities of ₹2.20b due beyond 12 months. On the other hand, it had cash of ₹64.6m and ₹362.8m worth of receivables due within a year. So it has liabilities totalling ₹2.69b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Bharat Wire Ropes is worth ₹5.09b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.32 times and a disturbingly high net debt to EBITDA ratio of 8.2 hit our confidence in Bharat Wire Ropes like a one-two punch to the gut. The debt burden here is substantial. The good news is that Bharat Wire Ropes grew its EBIT a smooth 50% over the last twelve months. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bharat Wire Ropes will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last two years, Bharat Wire Ropes saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Bharat Wire Ropes's interest cover left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at growing its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Bharat Wire Ropes stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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. To that end, you should learn about the 5 warning signs we've spotted with Bharat Wire Ropes (including 2 which are significant) .

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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