Shalimar Paints (NSE:SHALPAINTS) Is Carrying A Fair Bit Of Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Shalimar Paints Limited (NSE:SHALPAINTS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shalimar Paints

What Is Shalimar Paints's Net Debt?

As you can see below, Shalimar Paints had ₹1.32b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of ₹120.5m, its net debt is less, at about ₹1.20b.

How Healthy Is Shalimar Paints' Balance Sheet?

According to the last reported balance sheet, Shalimar Paints had liabilities of ₹2.11b due within 12 months, and liabilities of ₹374.7m due beyond 12 months. On the other hand, it had cash of ₹120.5m and ₹581.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.78b.

Shalimar Paints has a market capitalization of ₹5.12b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shalimar Paints will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Shalimar Paints made a loss at the EBIT level, and saw its revenue drop to ₹3.0b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

While Shalimar Paints's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹422m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹437m into a profit. So to be blunt we do think it is 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. Be aware that Shalimar Paints is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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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