Here's Why Brooks Laboratories (NSE:BROOKS) Can Afford Some Debt

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.' 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. Importantly, Brooks Laboratories Limited (NSE:BROOKS) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Brooks Laboratories

What Is Brooks Laboratories's Net Debt?

The image below, which you can click on for greater detail, shows that Brooks Laboratories had debt of ₹253.7m at the end of September 2020, a reduction from ₹299.7m over a year. However, because it has a cash reserve of ₹13.7m, its net debt is less, at about ₹240.0m.

How Strong Is Brooks Laboratories' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Brooks Laboratories had liabilities of ₹629.9m due within 12 months and liabilities of ₹135.3m due beyond that. Offsetting this, it had ₹13.7m in cash and ₹191.0m in receivables that were due within 12 months. So its liabilities total ₹560.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Brooks Laboratories has a market capitalization of ₹1.81b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Brooks Laboratories'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.

Over 12 months, Brooks Laboratories reported revenue of ₹804m, which is a gain of 31%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Brooks Laboratories's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₹18m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹103m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Brooks Laboratories (including 2 which don't sit too well with us) .

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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