We Think Shree Tirupati Balajee FIBC (NSE:TIRUPATI) Is Taking Some Risk With Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Shree Tirupati Balajee FIBC Limited (NSE:TIRUPATI) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shree Tirupati Balajee FIBC

How Much Debt Does Shree Tirupati Balajee FIBC Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Shree Tirupati Balajee FIBC had ₹326.8m of debt, an increase on ₹251.8m, over one year. However, because it has a cash reserve of ₹23.8m, its net debt is less, at about ₹303.1m.

A Look At Shree Tirupati Balajee FIBC's Liabilities

Zooming in on the latest balance sheet data, we can see that Shree Tirupati Balajee FIBC had liabilities of ₹319.6m due within 12 months and liabilities of ₹93.7m due beyond that. On the other hand, it had cash of ₹23.8m and ₹350.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹39.3m.

Given Shree Tirupati Balajee FIBC has a market capitalization of ₹469.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Shree Tirupati Balajee FIBC has a debt to EBITDA ratio of 4.7 and its EBIT covered its interest expense 3.3 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Worse, Shree Tirupati Balajee FIBC's EBIT was down 44% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shree Tirupati Balajee FIBC 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Shree Tirupati Balajee FIBC recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

On the face of it, Shree Tirupati Balajee FIBC's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its level of total liabilities is a good sign, and makes us more optimistic. Overall, we think it's fair to say that Shree Tirupati Balajee FIBC has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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. For example, we've discovered 4 warning signs for Shree Tirupati Balajee FIBC (2 are concerning!) that you should be aware of before investing here.

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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