Is Aditya Birla Fashion and Retail (NSE:ABFRL) Using Too Much Debt?

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. We note that Aditya Birla Fashion and Retail Limited (NSE:ABFRL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aditya Birla Fashion and Retail

What Is Aditya Birla Fashion and Retail's Debt?

You can click the graphic below for the historical numbers, but it shows that Aditya Birla Fashion and Retail had ₹45.3b of debt in September 2024, down from ₹48.2b, one year before. However, it also had ₹7.69b in cash, and so its net debt is ₹37.6b.

How Strong Is Aditya Birla Fashion and Retail's Balance Sheet?

According to the last reported balance sheet, Aditya Birla Fashion and Retail had liabilities of ₹85.9b due within 12 months, and liabilities of ₹99.9b due beyond 12 months. Offsetting these obligations, it had cash of ₹7.69b as well as receivables valued at ₹17.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹160.9b.

Aditya Birla Fashion and Retail has a market capitalization of ₹327.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aditya Birla Fashion and Retail's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Aditya Birla Fashion and Retail wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to ₹146b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Aditya Birla Fashion and Retail had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹2.3b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₹6.5b into a profit. So we do think this stock is quite risky. 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 instance, we've identified 2 warning signs for Aditya Birla Fashion and Retail that you should be aware of.

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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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.