Health Check: How Prudently Does Flexituff Ventures International (NSE:FLEXITUFF) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Flexituff Ventures International Limited (NSE:FLEXITUFF) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Flexituff Ventures International

What Is Flexituff Ventures International's Debt?

You can click the graphic below for the historical numbers, but it shows that Flexituff Ventures International had ₹3.30b of debt in September 2020, down from ₹4.90b, one year before. However, because it has a cash reserve of ₹364.0m, its net debt is less, at about ₹2.94b.

How Healthy Is Flexituff Ventures International's Balance Sheet?

We can see from the most recent balance sheet that Flexituff Ventures International had liabilities of ₹9.81b falling due within a year, and liabilities of ₹150.8m due beyond that. Offsetting this, it had ₹364.0m in cash and ₹2.43b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹7.16b.

The deficiency here weighs heavily on the ₹398.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Flexituff Ventures International would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Flexituff Ventures International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Flexituff Ventures International had a loss before interest and tax, and actually shrunk its revenue by 41%, to ₹7.2b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Flexituff Ventures International'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 ₹1.6b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹1.7b in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Flexituff Ventures International (2 are potentially serious) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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