Mukand (NSE:MUKANDLTD) Is Making Moderate Use Of 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 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. Importantly, Mukand Limited (NSE:MUKANDLTD) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View 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 ₹15.0b of debt in September 2023, down from ₹22.5b, one year before. Net debt is about the same, since the it doesn't have much cash.

A Look At Mukand's Liabilities

Zooming in on the latest balance sheet data, we can see that Mukand had liabilities of ₹5.99b due within 12 months and liabilities of ₹15.1b due beyond that. On the other hand, it had cash of ₹72.4m and ₹5.55b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹15.5b.

This deficit is considerable relative to its market capitalization of ₹24.5b, so it does suggest shareholders should keep an eye on Mukand's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 ₹52b, which is a fall of 6.3%. We would much prefer see growth.

Caveat Emptor

Importantly, Mukand had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹2.4b 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. Another cause for caution is that is bled ₹12m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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 4 warning signs for Mukand (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.