Sagardeep Alloys (NSE:SAGARDEEP) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Sagardeep Alloys Limited (NSE:SAGARDEEP) 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sagardeep Alloys

What Is Sagardeep Alloys's Net Debt?

As you can see below, at the end of September 2020, Sagardeep Alloys had ₹118.1m of debt, up from ₹107.8m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Sagardeep Alloys' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sagardeep Alloys had liabilities of ₹168.8m due within 12 months and liabilities of ₹6.64m due beyond that. On the other hand, it had cash of ₹1.89m and ₹119.3m worth of receivables due within a year. So its liabilities total ₹54.3m more than the combination of its cash and short-term receivables.

Of course, Sagardeep Alloys has a market capitalization of ₹759.1m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Sagardeep Alloys'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 Sagardeep Alloys wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to ₹534m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Sagardeep Alloys still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹5.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹24m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. Case in point: We've spotted 4 warning signs for Sagardeep Alloys you should be aware of, and 2 of them are concerning.

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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