Sundaram Multi Pap (NSE:SUNDARAM) 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.' 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. We note that Sundaram Multi Pap Limited (NSE:SUNDARAM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sundaram Multi Pap

How Much Debt Does Sundaram Multi Pap Carry?

The chart below, which you can click on for greater detail, shows that Sundaram Multi Pap had ₹460.2m in debt in September 2020; about the same as the year before. However, because it has a cash reserve of ₹156.9m, its net debt is less, at about ₹303.3m.

How Healthy Is Sundaram Multi Pap's Balance Sheet?

The latest balance sheet data shows that Sundaram Multi Pap had liabilities of ₹301.0m due within a year, and liabilities of ₹241.8m falling due after that. Offsetting these obligations, it had cash of ₹156.9m as well as receivables valued at ₹168.0m due within 12 months. So its liabilities total ₹217.8m more than the combination of its cash and short-term receivables.

Sundaram Multi Pap has a market capitalization of ₹672.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Sundaram Multi Pap 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 Sundaram Multi Pap had a loss before interest and tax, and actually shrunk its revenue by 40%, to ₹616m. To be frank that doesn't bode well.

Caveat Emptor

While Sundaram Multi Pap's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹52m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of ₹76m. So to be blunt we do think it 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. Take risks, for example - Sundaram Multi Pap has 2 warning signs we think you should be aware of.

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.

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