Is Prajay Engineers Syndicate (NSE:PRAENG) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Prajay Engineers Syndicate

How Much Debt Does Prajay Engineers Syndicate Carry?

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. However, it does have ₹75.9m in cash offsetting this, leading to net debt of about ₹1.55b.

How Strong Is Prajay Engineers Syndicate's Balance Sheet?

The latest balance sheet data shows that Prajay Engineers Syndicate had liabilities of ₹4.97b due within a year, and liabilities of ₹1.60b falling due after that. Offsetting these obligations, it had cash of ₹75.9m as well as receivables valued at ₹1.91b due within 12 months. So it has liabilities totalling ₹4.59b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹732.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Prajay Engineers Syndicate would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Prajay Engineers Syndicate made a loss at the EBIT level, and saw its revenue drop to ₹429m, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

While Prajay Engineers Syndicate's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹8.0m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹106m in the last year. So we think buying this stock is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Prajay Engineers Syndicate (including 1 which is is concerning) .

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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