Would Archies (NSE:ARCHIES) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Archies Limited (NSE:ARCHIES) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Archies

How Much Debt Does Archies Carry?

As you can see below, at the end of March 2024, Archies had ₹278.4m of debt, up from ₹204.4m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Archies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Archies had liabilities of ₹467.9m due within 12 months and liabilities of ₹254.3m due beyond that. On the other hand, it had cash of ₹1.63m and ₹80.3m worth of receivables due within a year. So its liabilities total ₹640.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹875.6m, so it does suggest shareholders should keep an eye on Archies' 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 Archies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Archies made a loss at the EBIT level, and saw its revenue drop to ₹788m, which is a fall of 5.9%. We would much prefer see growth.

Caveat Emptor

Importantly, Archies had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹74m. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹82m. So to be blunt we do 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. We've identified 1 warning sign with Archies , and understanding them should be part of your investment process.

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.