Is Brooks Laboratories (NSE:BROOKS) A Risky Investment?

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. Importantly, Brooks Laboratories Limited (NSE:BROOKS) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Brooks Laboratories

What Is Brooks Laboratories's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Brooks Laboratories had ₹305.0m of debt, an increase on ₹264.2m, over one year. On the flip side, it has ₹17.0m in cash leading to net debt of about ₹287.9m.

A Look At Brooks Laboratories' Liabilities

We can see from the most recent balance sheet that Brooks Laboratories had liabilities of ₹637.1m falling due within a year, and liabilities of ₹192.1m due beyond that. Offsetting this, it had ₹17.0m in cash and ₹141.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹670.9m.

Brooks Laboratories has a market capitalization of ₹2.08b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Brooks Laboratories will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Brooks Laboratories wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to ₹772m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Brooks Laboratories had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹59m. 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. Another cause for caution is that is bled ₹12m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For instance, we've identified 3 warning signs for Brooks Laboratories (1 is potentially serious) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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