Does Poddar Housing and Development (NSE:PODDARHOUS) Have A Healthy Balance Sheet?

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. We note that Poddar Housing and Development Limited (NSE:PODDARHOUS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Poddar Housing and Development

What Is Poddar Housing and Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Poddar Housing and Development had ₹3.70b of debt, an increase on ₹2.78b, over one year. However, because it has a cash reserve of ₹97.6m, its net debt is less, at about ₹3.61b.

A Look At Poddar Housing and Development's Liabilities

Zooming in on the latest balance sheet data, we can see that Poddar Housing and Development had liabilities of ₹2.00b due within 12 months and liabilities of ₹3.47b due beyond that. Offsetting these obligations, it had cash of ₹97.6m as well as receivables valued at ₹146.6m due within 12 months. So it has liabilities totalling ₹5.23b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹1.26b 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 definitely think shareholders need to watch this one closely. After all, Poddar Housing and Development 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 you can't view debt in total isolation; since Poddar Housing and Development 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.

In the last year Poddar Housing and Development wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to ₹635m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Poddar Housing and Development produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹90m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₹425m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Poddar Housing and Development (including 2 which don't sit too well with us) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.