Is Nagarjuna Fertilizers and Chemicals (NSE:NAGAFERT) Weighed On By Its Debt Load?

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.' 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. Importantly, Nagarjuna Fertilizers and Chemicals Limited (NSE:NAGAFERT) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nagarjuna Fertilizers and Chemicals

What Is Nagarjuna Fertilizers and Chemicals's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2020 Nagarjuna Fertilizers and Chemicals had debt of ₹21.7b, up from ₹18.1b in one year. On the flip side, it has ₹1.48b in cash leading to net debt of about ₹20.2b.

A Look At Nagarjuna Fertilizers and Chemicals's Liabilities

Zooming in on the latest balance sheet data, we can see that Nagarjuna Fertilizers and Chemicals had liabilities of ₹34.7b due within 12 months and liabilities of ₹4.31b due beyond that. Offsetting this, it had ₹1.48b in cash and ₹12.6b in receivables that were due within 12 months. So it has liabilities totalling ₹25.0b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹2.54b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Nagarjuna Fertilizers and Chemicals would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Nagarjuna Fertilizers and Chemicals 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 Nagarjuna Fertilizers and Chemicals had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₹17b. That's not what we would hope to see.

Caveat Emptor

Not only did Nagarjuna Fertilizers and Chemicals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹1.9b at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹4.6b in the last year. So we think buying this stock is risky. 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. Be aware that Nagarjuna Fertilizers and Chemicals is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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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