These 4 Measures Indicate That Ind-Swift Laboratories (NSE:INDSWFTLAB) Is Using Debt Extensively

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Ind-Swift Laboratories Limited (NSE:INDSWFTLAB) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ind-Swift Laboratories

How Much Debt Does Ind-Swift Laboratories Carry?

You can click the graphic below for the historical numbers, but it shows that Ind-Swift Laboratories had ₹10.0b of debt in September 2020, down from ₹10.8b, one year before. However, it does have ₹626.2m in cash offsetting this, leading to net debt of about ₹9.42b.

How Strong Is Ind-Swift Laboratories's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ind-Swift Laboratories had liabilities of ₹3.17b due within 12 months and liabilities of ₹9.05b due beyond that. On the other hand, it had cash of ₹626.2m and ₹4.24b worth of receivables due within a year. So its liabilities total ₹7.36b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹2.96b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Ind-Swift Laboratories would probably need a major re-capitalization if its creditors were to demand repayment.

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).

Weak interest cover of 1.0 times and a disturbingly high net debt to EBITDA ratio of 6.5 hit our confidence in Ind-Swift Laboratories like a one-two punch to the gut. The debt burden here is substantial. Looking on the bright side, Ind-Swift Laboratories boosted its EBIT by a silky 88% in the last year. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ind-Swift Laboratories's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Ind-Swift Laboratories 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

On the face of it, Ind-Swift Laboratories's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Ind-Swift Laboratories stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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. Take risks, for example - Ind-Swift Laboratories has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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