Does Prajay Engineers Syndicate (NSE:PRAENG) Have A Healthy Balance Sheet?

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.' 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. We note that Prajay Engineers Syndicate Limited (NSE:PRAENG) 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 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Prajay Engineers Syndicate

What Is Prajay Engineers Syndicate's Net Debt?

As you can see below, Prajay Engineers Syndicate had ₹1.63b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₹75.9m in cash leading to net debt of about ₹1.55b.

A Look At Prajay Engineers Syndicate's Liabilities

Zooming in on the latest balance sheet data, we can see that Prajay Engineers Syndicate had liabilities of ₹4.97b due within 12 months and liabilities of ₹1.60b due beyond that. Offsetting this, it had ₹75.9m in cash and ₹1.91b in receivables that were due within 12 months. So its liabilities total ₹4.59b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹527.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Prajay Engineers Syndicate 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 Prajay Engineers Syndicate 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 Prajay Engineers Syndicate had a loss before interest and tax, and actually shrunk its revenue by 5.4%, to ₹373m. That's not what we would hope to see.

Caveat Emptor

Importantly, Prajay Engineers Syndicate had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹80m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹129m in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Prajay Engineers Syndicate (1 is potentially serious) you should be aware of.

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.

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