We Think Supreme Industries (NSE:SUPREMEIND) Can Stay On Top Of Its Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies The Supreme Industries Limited (NSE:SUPREMEIND) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Supreme Industries

How Much Debt Does Supreme Industries Carry?

As you can see below, at the end of March 2022, Supreme Industries had ₹456.8m of debt, up from ₹376.7m a year ago. Click the image for more detail. But it also has ₹5.19b in cash to offset that, meaning it has ₹4.73b net cash.

How Strong Is Supreme Industries' Balance Sheet?

The latest balance sheet data shows that Supreme Industries had liabilities of ₹10.0b due within a year, and liabilities of ₹1.51b falling due after that. Offsetting this, it had ₹5.19b in cash and ₹5.97b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹351.1m.

This state of affairs indicates that Supreme Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹246.2b company is short on cash, but still worth keeping an eye on the 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!

On the other hand, Supreme Industries saw its EBIT drop by 9.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Supreme Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Supreme Industries's liabilities, but we can be reassured by the fact it has has net cash of ₹4.73b. So we don't have any problem with Supreme Industries's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Supreme Industries you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.