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 can see that Madhav Copper Limited (NSE:MCL) does use debt in its business. But the more important question is: how much risk is that debt creating?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
Check out our latest analysis for Madhav Copper
What Is Madhav Copper's Net Debt?
As you can see below, at the end of March 2024, Madhav Copper had ₹134.4m of debt, up from ₹10.4m a year ago. Click the image for more detail. However, it does have ₹2.71m in cash offsetting this, leading to net debt of about ₹131.7m.
A Look At Madhav Copper's Liabilities
We can see from the most recent balance sheet that Madhav Copper had liabilities of ₹196.0m falling due within a year, and liabilities of ₹31.7m due beyond that. Offsetting this, it had ₹2.71m in cash and ₹51.8m in receivables that were due within 12 months. So its liabilities total ₹173.2m more than the combination of its cash and short-term receivables.
Since publicly traded Madhav Copper shares are worth a total of ₹1.10b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Madhav Copper'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.
While it hasn't made a profit, at least Madhav Copper booked its first revenue as a publicly listed company, in the last twelve months.
Caveat Emptor
Over the last twelve months Madhav Copper produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹31m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹22m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Madhav Copper (of which 1 is a bit unpleasant!) you should know about.
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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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.
About NSEI:MCL
Adequate balance sheet with questionable track record.
