Health Check: How Prudently Does Sintex Plastics Technology (NSE:SPTL) Use 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. As with many other companies Sintex Plastics Technology Limited (NSE:SPTL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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.

Check out our latest analysis for Sintex Plastics Technology

How Much Debt Does Sintex Plastics Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Sintex Plastics Technology had debt of ₹24.9b, up from ₹15.4b in one year. On the flip side, it has ₹2.88b in cash leading to net debt of about ₹22.1b.

How Healthy Is Sintex Plastics Technology's Balance Sheet?

According to the last reported balance sheet, Sintex Plastics Technology had liabilities of ₹37.4b due within 12 months, and liabilities of ₹412.6m due beyond 12 months. On the other hand, it had cash of ₹2.88b and ₹874.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹34.1b.

The deficiency here weighs heavily on the ₹1.53b 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'd watch its balance sheet closely, without a doubt. After all, Sintex Plastics Technology would likely require a major re-capitalisation if it had to pay its creditors today. 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 Sintex Plastics Technology 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.

In the last year Sintex Plastics Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to ₹11b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Sintex Plastics Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₹4.0b at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹4.2b in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Sintex Plastics Technology you should be aware of, and 1 of them is concerning.

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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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.