Does Tamil Nadu Newsprint and Papers (NSE:TNPL) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Tamil Nadu Newsprint and Papers Limited (NSE:TNPL) 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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tamil Nadu Newsprint and Papers

What Is Tamil Nadu Newsprint and Papers's Net Debt?

As you can see below, at the end of September 2020, Tamil Nadu Newsprint and Papers had ₹17.5b of debt, up from ₹16.3b a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Tamil Nadu Newsprint and Papers' Balance Sheet?

The latest balance sheet data shows that Tamil Nadu Newsprint and Papers had liabilities of ₹27.1b due within a year, and liabilities of ₹14.4b falling due after that. Offsetting these obligations, it had cash of ₹83.1m as well as receivables valued at ₹3.26b due within 12 months. So it has liabilities totalling ₹38.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹10.2b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Tamil Nadu Newsprint and Papers would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Tamil Nadu Newsprint and Papers shareholders face the double whammy of a high net debt to EBITDA ratio (5.6), and fairly weak interest coverage, since EBIT is just 0.47 times the interest expense. The debt burden here is substantial. Worse, Tamil Nadu Newsprint and Papers's EBIT was down 83% 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tamil Nadu Newsprint and Papers'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Tamil Nadu Newsprint and Papers actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

To be frank both Tamil Nadu Newsprint and Papers's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Overall, it seems to us that Tamil Nadu Newsprint and Papers's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tamil Nadu Newsprint and Papers is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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. 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.
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