Is Malu Paper Mills (NSE:MALUPAPER) Using Too Much 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Malu Paper Mills Limited (NSE:MALUPAPER) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Malu Paper Mills

What Is Malu Paper Mills's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Malu Paper Mills had ₹1.10b of debt, an increase on ₹997.1m, over one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Malu Paper Mills' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Malu Paper Mills had liabilities of ₹1.36b due within 12 months and liabilities of ₹60.7m due beyond that. Offsetting this, it had ₹18.3m in cash and ₹294.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.10b.

This deficit casts a shadow over the ₹436.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Malu Paper Mills would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Malu Paper Mills'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 Malu Paper Mills wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to ₹2.5b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Malu Paper Mills still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹28m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₹19m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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 example - Malu Paper Mills has 3 warning signs we think you should be aware of.

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. 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.