Is Shreyans Industries (NSE:SHREYANIND) Using Debt In A Risky Way?

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. Importantly, Shreyans Industries Limited (NSE:SHREYANIND) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shreyans Industries

What Is Shreyans Industries's Debt?

As you can see below, Shreyans Industries had ₹507.0m of debt at March 2021, down from ₹560.1m a year prior. But it also has ₹895.3m in cash to offset that, meaning it has ₹388.3m net cash.

How Strong Is Shreyans Industries' Balance Sheet?

According to the last reported balance sheet, Shreyans Industries had liabilities of ₹1.14b due within 12 months, and liabilities of ₹584.4m due beyond 12 months. On the other hand, it had cash of ₹895.3m and ₹295.3m worth of receivables due within a year. So its liabilities total ₹530.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shreyans Industries is worth ₹1.28b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Shreyans Industries boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shreyans Industries's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Shreyans Industries had a loss before interest and tax, and actually shrunk its revenue by 32%, to ₹3.7b. That makes us nervous, to say the least.

So How Risky Is Shreyans Industries?

Although Shreyans Industries had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₹88m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 - Shreyans Industries has 4 warning signs we think you should be aware of.

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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