These 4 Measures Indicate That Shivalik Bimetal Controls (NSE:SBCL) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Shivalik Bimetal Controls Limited (NSE:SBCL) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shivalik Bimetal Controls

How Much Debt Does Shivalik Bimetal Controls Carry?

You can click the graphic below for the historical numbers, but it shows that Shivalik Bimetal Controls had ₹422.7m of debt in March 2024, down from ₹581.6m, one year before. On the flip side, it has ₹388.9m in cash leading to net debt of about ₹33.8m.

How Strong Is Shivalik Bimetal Controls' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shivalik Bimetal Controls had liabilities of ₹821.9m due within 12 months and liabilities of ₹190.7m due beyond that. On the other hand, it had cash of ₹388.9m and ₹1.14b worth of receivables due within a year. So it can boast ₹515.6m more liquid assets than total liabilities.

Having regard to Shivalik Bimetal Controls' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹38.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Shivalik Bimetal Controls has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Shivalik Bimetal Controls has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.032 and EBIT of 19.1 times the interest expense. So relative to past earnings, the debt load seems trivial. On the other hand, Shivalik Bimetal Controls saw its EBIT drop by 4.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shivalik Bimetal Controls can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Shivalik Bimetal Controls reported free cash flow worth 20% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

The good news is that Shivalik Bimetal Controls's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that Shivalik Bimetal Controls can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shivalik Bimetal Controls is showing 1 warning sign in our investment analysis , 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.

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