Does Shah Alloys (NSE:SHAHALLOYS) Have A Healthy Balance Sheet?

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. We note that Shah Alloys Limited (NSE:SHAHALLOYS) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shah Alloys

How Much Debt Does Shah Alloys Carry?

The image below, which you can click on for greater detail, shows that Shah Alloys had debt of ₹802.0m at the end of March 2024, a reduction from ₹849.7m over a year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Shah Alloys' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shah Alloys had liabilities of ₹1.26b due within 12 months and liabilities of ₹1.21b due beyond that. Offsetting these obligations, it had cash of ₹2.20m as well as receivables valued at ₹71.1m due within 12 months. So it has liabilities totalling ₹2.39b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹1.42b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Shah Alloys 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 it is Shah 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.

Over 12 months, Shah Alloys made a loss at the EBIT level, and saw its revenue drop to ₹5.9b, which is a fall of 5.4%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Shah Alloys produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₹55m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₹119m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Shah Alloys (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.