Is Techindia Nirman (NSE:TECHIN) Weighed On By Its Debt Load?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Techindia Nirman Limited (NSE:TECHIN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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What Is Techindia Nirman's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Techindia Nirman had debt of ₹666.1m, up from ₹580.0m in one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Techindia Nirman's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Techindia Nirman had liabilities of ₹666.7m due within 12 months and liabilities of ₹513.0k due beyond that. Offsetting this, it had ₹494.0k in cash and ₹2.02m in receivables that were due within 12 months. So its liabilities total ₹664.7m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹208.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Techindia Nirman would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Techindia Nirman 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.

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

Caveat Emptor

Importantly, Techindia Nirman had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹3.6m 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. But we think that is unlikely, given it is low on liquid assets, and burned through ₹90m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Be aware that Techindia Nirman is showing 4 warning signs in our investment analysis , 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.

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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.