Is Poddar Housing and Development (NSE:PODDARHOUS) Using Debt In A Risky Way?

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.' 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. As with many other companies Poddar Housing and Development Limited (NSE:PODDARHOUS) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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 Poddar Housing and Development

How Much Debt Does Poddar Housing and Development Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Poddar Housing and Development had ₹2.60b of debt, an increase on ₹2.07b, over one year. On the flip side, it has ₹201.9m in cash leading to net debt of about ₹2.40b.

A Look At Poddar Housing and Development's Liabilities

The latest balance sheet data shows that Poddar Housing and Development had liabilities of ₹1.72b due within a year, and liabilities of ₹2.25b falling due after that. Offsetting these obligations, it had cash of ₹201.9m as well as receivables valued at ₹101.9m due within 12 months. So its liabilities total ₹3.66b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹1.17b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Poddar Housing and Development would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Poddar Housing and Development 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 Poddar Housing and Development had a loss before interest and tax, and actually shrunk its revenue by 37%, to ₹350m. To be frank that doesn't bode well.

Caveat Emptor

While Poddar Housing and Development's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹175m 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. Nevertheless, we would not bet on it given that it vaporized ₹322m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Poddar Housing and Development has 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.

When trading Poddar Housing and Development or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.