Is Seya Industries (NSE:SEYAIND) Using Debt Sensibly?

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.' 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. As with many other companies Seya Industries Limited (NSE:SEYAIND) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Seya Industries

How Much Debt Does Seya Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Seya Industries had ₹8.22b of debt, an increase on ₹7.69b, over one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Seya Industries' Balance Sheet?

The latest balance sheet data shows that Seya Industries had liabilities of ₹977.0m due within a year, and liabilities of ₹7.78b falling due after that. Offsetting this, it had ₹21.9m in cash and ₹489.7m in receivables that were due within 12 months. So it has liabilities totalling ₹8.24b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹2.03b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Seya Industries 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 Seya Industries 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.

Over 12 months, Seya Industries made a loss at the EBIT level, and saw its revenue drop to ₹524m, which is a fall of 80%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Seya Industries's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹104m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through ₹90m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Seya Industries has 5 warning signs (and 2 which are concerning) we think you should know about.

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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