Is Sintex Plastics Technology (NSE:SPTL) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Sintex Plastics Technology Limited (NSE:SPTL) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.

See our latest analysis for Sintex Plastics Technology

What Is Sintex Plastics Technology's Net Debt?

As you can see below, Sintex Plastics Technology had ₹31.0b of debt, at March 2021, 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 ₹5.93b, its net debt is less, at about ₹25.1b.

How Strong Is Sintex Plastics Technology's Balance Sheet?

We can see from the most recent balance sheet that Sintex Plastics Technology had liabilities of ₹45.3b falling due within a year, and liabilities of ₹2.66b due beyond that. Offsetting this, it had ₹5.93b in cash and ₹1.82b in receivables that were due within 12 months. So it has liabilities totalling ₹40.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹2.96b company, like a colossus towering over mere mortals. 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. There's no doubt that we learn most about debt from the balance sheet. But it is Sintex Plastics Technology'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.

In the last year Sintex Plastics Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to ₹9.5b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Sintex Plastics Technology's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable ₹822m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 ₹3.7b in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sintex Plastics Technology (of which 1 doesn't sit too well with us!) you should know about.

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.

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.

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