Health Check: How Prudently Does Ashiana Housing (NSE:ASHIANA) Use Debt?

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 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, Ashiana Housing Limited (NSE:ASHIANA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ashiana Housing

What Is Ashiana Housing's Debt?

The image below, which you can click on for greater detail, shows that Ashiana Housing had debt of ₹527.7m at the end of September 2020, a reduction from ₹1.11b over a year. However, it does have ₹1.81b in cash offsetting this, leading to net cash of ₹1.28b.

How Strong Is Ashiana Housing's Balance Sheet?

The latest balance sheet data shows that Ashiana Housing had liabilities of ₹3.29b due within a year, and liabilities of ₹1.02b falling due after that. On the other hand, it had cash of ₹1.81b and ₹278.5m worth of receivables due within a year. So it has liabilities totalling ₹2.22b more than its cash and near-term receivables, combined.

Ashiana Housing has a market capitalization of ₹10.7b, 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. Despite its noteworthy liabilities, Ashiana Housing boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ashiana Housing 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, Ashiana Housing made a loss at the EBIT level, and saw its revenue drop to ₹2.5b, which is a fall of 6.0%. That's not what we would hope to see.

So How Risky Is Ashiana Housing?

While Ashiana Housing lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₹224m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For instance, we've identified 2 warning signs for Ashiana Housing (1 doesn't sit too well with us) you should be aware of.

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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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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