Does Mukta Arts (NSE:MUKTAARTS) Have A Healthy Balance Sheet?

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.' 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 can see that Mukta Arts Limited (NSE:MUKTAARTS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mukta Arts

What Is Mukta Arts's Debt?

You can click the graphic below for the historical numbers, but it shows that Mukta Arts had ₹581.5m of debt in March 2021, down from ₹837.6m, one year before. On the flip side, it has ₹270.2m in cash leading to net debt of about ₹311.2m.

How Healthy Is Mukta Arts' Balance Sheet?

The latest balance sheet data shows that Mukta Arts had liabilities of ₹1.42b due within a year, and liabilities of ₹1.01b falling due after that. Offsetting these obligations, it had cash of ₹270.2m as well as receivables valued at ₹333.8m due within 12 months. So its liabilities total ₹1.82b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹910.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Mukta Arts would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mukta Arts 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.

Over 12 months, Mukta Arts made a loss at the EBIT level, and saw its revenue drop to ₹729m, which is a fall of 58%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Mukta Arts's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹119m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of ₹118m. And until that time we think this is a risky stock. 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 Mukta Arts is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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