We Think Century Textiles and Industries (NSE:CENTURYTEX) Has A Fair Chunk Of Debt

Warren Buffett famously said, '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. As with many other companies Century Textiles and Industries Limited (NSE:CENTURYTEX) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Century Textiles and Industries

What Is Century Textiles and Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Century Textiles and Industries had ₹11.6b of debt in March 2021, down from ₹13.8b, one year before. On the flip side, it has ₹1.90b in cash leading to net debt of about ₹9.72b.

How Strong Is Century Textiles and Industries' Balance Sheet?

We can see from the most recent balance sheet that Century Textiles and Industries had liabilities of ₹14.9b falling due within a year, and liabilities of ₹15.5b due beyond that. Offsetting this, it had ₹1.90b in cash and ₹1.59b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹27.0b.

This deficit isn't so bad because Century Textiles and Industries is worth ₹64.0b, 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 you can't view debt in total isolation; since Century Textiles and Industries 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.

In the last year Century Textiles and Industries had a loss before interest and tax, and actually shrunk its revenue by 24%, to ₹26b. To be frank that doesn't bode well.

Caveat Emptor

While Century Textiles and Industries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹74m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of ₹119m into a profit. In the meantime, we consider the stock very risky. For riskier companies like Century Textiles and Industries I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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