Is Prozone Intu Properties (NSE:PROZONINTU) Using Debt Sensibly?

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. Importantly, Prozone Intu Properties Limited (NSE:PROZONINTU) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Prozone Intu Properties

What Is Prozone Intu Properties's Net Debt?

As you can see below, at the end of September 2020, Prozone Intu Properties had ₹4.38b of debt, up from ₹4.01b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹172.6m, its net debt is less, at about ₹4.21b.

A Look At Prozone Intu Properties's Liabilities

Zooming in on the latest balance sheet data, we can see that Prozone Intu Properties had liabilities of ₹3.50b due within 12 months and liabilities of ₹4.67b due beyond that. Offsetting these obligations, it had cash of ₹172.6m as well as receivables valued at ₹1.09b due within 12 months. So its liabilities total ₹6.90b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹3.14b 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, Prozone Intu Properties would probably need a major re-capitalization if its creditors were to demand repayment. 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 Prozone Intu Properties 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Prozone Intu Properties can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Not only did Prozone Intu Properties's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹118m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₹599m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Prozone Intu Properties (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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