These 4 Measures Indicate That Poddar Housing and Development (NSE:PODDARHOUS) Is Using Debt Extensively

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Poddar Housing and Development Limited (NSE:PODDARHOUS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Poddar Housing and Development

How Much Debt Does Poddar Housing and Development Carry?

As you can see below, at the end of March 2021, Poddar Housing and Development had ₹2.49b of debt, up from ₹2.36b a year ago. Click the image for more detail. However, it also had ₹344.0m in cash, and so its net debt is ₹2.15b.

How Strong Is Poddar Housing and Development's Balance Sheet?

According to the last reported balance sheet, Poddar Housing and Development had liabilities of ₹1.33b due within 12 months, and liabilities of ₹2.81b due beyond 12 months. On the other hand, it had cash of ₹344.0m and ₹232.6m worth of receivables due within a year. So it has liabilities totalling ₹3.56b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹1.24b 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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 0.33 times and a disturbingly high net debt to EBITDA ratio of 42.0 hit our confidence in Poddar Housing and Development like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. However, the silver lining was that Poddar Housing and Development achieved a positive EBIT of ₹38m in the last twelve months, an improvement on the prior year's loss. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Poddar Housing and Development actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

On the face of it, Poddar Housing and Development'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 at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. We're quite clear that we consider Poddar Housing and Development to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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 example Poddar Housing and Development has 3 warning signs (and 2 which are significant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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