Supreme Industries (NSE:SUPREMEIND) Seems To Use Debt Quite Sensibly
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, The Supreme Industries Limited (NSE:SUPREMEIND) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Supreme Industries
What Is Supreme Industries's Debt?
The image below, which you can click on for greater detail, shows that at September 2022 Supreme Industries had debt of ₹420.5m, up from ₹310.9m in one year. But it also has ₹5.04b in cash to offset that, meaning it has ₹4.62b net cash.
How Healthy Is Supreme Industries' Balance Sheet?
We can see from the most recent balance sheet that Supreme Industries had liabilities of ₹10.2b falling due within a year, and liabilities of ₹1.43b due beyond that. Offsetting these obligations, it had cash of ₹5.04b as well as receivables valued at ₹4.65b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.91b.
Having regard to Supreme Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹323.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Supreme Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Supreme Industries's load is not too heavy, because its EBIT was down 23% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Supreme Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Supreme Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Supreme Industries recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Supreme Industries has ₹4.62b in net cash. So we don't have any problem with Supreme Industries's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Supreme Industries is showing 1 warning sign in our investment analysis , you should know about...
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.
Valuation is complex, but we're helping make it simple.
Find out whether Supreme Industries is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
The Supreme Industries Limited manufactures and sells plastic products primarily in India.
Flawless balance sheet with high growth potential and pays a dividend.