Is Shah Metacorp (NSE:SHAH) A Risky Investment?

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 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. As with many other companies Shah Metacorp Limited (NSE:SHAH) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shah Metacorp

How Much Debt Does Shah Metacorp Carry?

You can click the graphic below for the historical numbers, but it shows that Shah Metacorp had ₹415.0m of debt in September 2023, down from ₹819.8m, one year before. On the flip side, it has ₹286.6m in cash leading to net debt of about ₹128.4m.

How Strong Is Shah Metacorp's Balance Sheet?

The latest balance sheet data shows that Shah Metacorp had liabilities of ₹376.8m due within a year, and liabilities of ₹366.8m falling due after that. Offsetting these obligations, it had cash of ₹286.6m as well as receivables valued at ₹274.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹182.8m.

Given Shah Metacorp has a market capitalization of ₹1.34b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Shah Metacorp 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 Shah Metacorp wasn't profitable at an EBIT level, but managed to grow its revenue by 429%, to ₹736m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Shah Metacorp still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹42m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹324m of cash over the last year. So suffice it to say we consider the stock very risky. 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, we've discovered 3 warning signs for Shah Metacorp (2 are a bit unpleasant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.