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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Aditya Birla Fashion and Retail Limited (NSE:ABFRL) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Aditya Birla Fashion and Retail

What Is Aditya Birla Fashion and Retail's Net 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 ₹101.7b, up from ₹46.2b in one year. On the flip side, it has ₹4.66b in cash leading to net debt of about ₹97.1b.

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

The latest balance sheet data shows that Aditya Birla Fashion and Retail had liabilities of ₹96.5b due within a year, and liabilities of ₹88.3b falling due after that. 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 deficit is considerable relative to its market capitalization of ₹202.4b, so it does suggest shareholders should keep an eye on Aditya Birla Fashion and Retail's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Aditya Birla Fashion and Retail reported revenue of ₹135b, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Aditya Birla Fashion and Retail produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹1.8b 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 to be blunt we think it is 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. Case in point: We've spotted 2 warning signs for Aditya Birla Fashion and Retail you should be aware of.

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.