Is Sintex Plastics Technology (NSE:SPTL) Using Too Much 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.' 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. As with many other companies Sintex Plastics Technology Limited (NSE:SPTL) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Sintex Plastics Technology

How Much Debt Does Sintex Plastics Technology Carry?

As you can see below, Sintex Plastics Technology had ₹20.5b of debt at September 2020, down from ₹37.3b a year prior. However, it also had ₹7.11b in cash, and so its net debt is ₹13.4b.

How Strong Is Sintex Plastics Technology's Balance Sheet?

According to the last reported balance sheet, Sintex Plastics Technology had liabilities of ₹42.1b due within 12 months, and liabilities of ₹2.95b due beyond 12 months. On the other hand, it had cash of ₹7.11b and ₹1.94b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹36.0b.

The deficiency here weighs heavily on the ₹2.05b 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 definitely think shareholders need to watch this one closely. At the end of the day, Sintex Plastics Technology 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 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.

Over 12 months, Sintex Plastics Technology made a loss at the EBIT level, and saw its revenue drop to ₹7.0b, which is a fall of 81%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sintex Plastics Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹2.5b 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. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹6.8b in the last year. So we think buying this stock is risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Sintex Plastics Technology (at least 1 which is significant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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