Does Supreme Engineering (NSE:SUPREMEENG) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Supreme Engineering Limited (NSE:SUPREMEENG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Supreme Engineering

How Much Debt Does Supreme Engineering Carry?

As you can see below, Supreme Engineering had ₹1.01b of debt at March 2022, down from ₹1.06b a year prior. And it doesn't have much cash, so its net debt is about the same.

A Look At Supreme Engineering's Liabilities

We can see from the most recent balance sheet that Supreme Engineering had liabilities of ₹1.04b falling due within a year, and liabilities of ₹198.1m due beyond that. On the other hand, it had cash of ₹19.1m and ₹211.7m worth of receivables due within a year. So it has liabilities totalling ₹1.01b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹587.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Supreme Engineering 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 Supreme Engineering'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.

Over 12 months, Supreme Engineering reported revenue of ₹728m, which is a gain of 4.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Supreme Engineering produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₹80m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₹91m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 Supreme Engineering 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.

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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.