Does Kolte-Patil Developers (NSE:KOLTEPATIL) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Kolte-Patil Developers Limited (NSE:KOLTEPATIL) does use debt in its business. But the more important question is: how much risk is that debt creating?

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, 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.

Check out our latest analysis for Kolte-Patil Developers

What Is Kolte-Patil Developers's Debt?

As you can see below, Kolte-Patil Developers had ₹5.25b of debt at September 2020, down from ₹8.67b a year prior. On the flip side, it has ₹1.01b in cash leading to net debt of about ₹4.23b.

How Healthy Is Kolte-Patil Developers's Balance Sheet?

We can see from the most recent balance sheet that Kolte-Patil Developers had liabilities of ₹23.2b falling due within a year, and liabilities of ₹5.46b due beyond that. Offsetting these obligations, it had cash of ₹1.01b as well as receivables valued at ₹515.6m due within 12 months. So it has liabilities totalling ₹27.2b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹16.1b 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'd watch its balance sheet closely, without a doubt. After all, Kolte-Patil Developers 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 it is Kolte-Patil Developers'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.

In the last year Kolte-Patil Developers had a loss before interest and tax, and actually shrunk its revenue by 46%, to ₹5.7b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Kolte-Patil Developers's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹215m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₹784m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. Case in point: We've spotted 3 warning signs for Kolte-Patil Developers you should be aware of, and 1 of them shouldn't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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