Is Mukand (NSE:MUKANDLTD) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Mukand Limited (NSE:MUKANDLTD) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Mukand

What Is Mukand's Debt?

You can click the graphic below for the historical numbers, but it shows that Mukand had ₹20.4b of debt in March 2021, down from ₹27.6b, one year before. However, it does have ₹6.33b in cash offsetting this, leading to net debt of about ₹14.1b.

How Strong Is Mukand's Balance Sheet?

We can see from the most recent balance sheet that Mukand had liabilities of ₹9.53b falling due within a year, and liabilities of ₹18.3b due beyond that. On the other hand, it had cash of ₹6.33b and ₹6.99b worth of receivables due within a year. So its liabilities total ₹14.5b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹16.4b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mukand 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.

Over 12 months, Mukand made a loss at the EBIT level, and saw its revenue drop to ₹27b, which is a fall of 6.7%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Mukand produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₹5.2b 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹3.3b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Mukand you should be aware of, and 1 of them is a bit concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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