We Think Aditya Birla Fashion and Retail (NSE:ABFRL) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Aditya Birla Fashion and Retail Limited (NSE:ABFRL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Aditya Birla Fashion and Retail

What Is Aditya Birla Fashion and Retail's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Aditya Birla Fashion and Retail had debt of ₹48.2b, up from ₹13.7b in one year. However, it also had ₹4.66b in cash, and so its net debt is ₹43.5b.

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

According to the last reported balance sheet, Aditya Birla Fashion and Retail had liabilities of ₹96.5b due within 12 months, and liabilities of ₹88.3b due beyond 12 months. On the other hand, it had cash of ₹4.66b and ₹17.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹163.0b.

This is a mountain of leverage relative to its market capitalization of ₹217.6b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Aditya Birla Fashion and Retail wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to ₹129b. 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 ₹1.7b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹6.7b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Aditya Birla Fashion and Retail .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.