Arvind Fashions (NSE:ARVINDFASN) Is Carrying A Fair Bit Of Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Arvind Fashions Limited (NSE:ARVINDFASN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Arvind Fashions

What Is Arvind Fashions's Net Debt?

The image below, which you can click on for greater detail, shows that Arvind Fashions had debt of ₹8.43b at the end of September 2021, a reduction from ₹10.6b over a year. However, it also had ₹4.25b in cash, and so its net debt is ₹4.18b.

How Healthy Is Arvind Fashions' Balance Sheet?

The latest balance sheet data shows that Arvind Fashions had liabilities of ₹20.7b due within a year, and liabilities of ₹7.41b falling due after that. Offsetting this, it had ₹4.25b in cash and ₹6.25b in receivables that were due within 12 months. So its liabilities total ₹17.6b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Arvind Fashions is worth ₹41.7b, and thus could probably raise enough capital to shore up 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 Arvind Fashions'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 Arvind Fashions wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to ₹29b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Arvind Fashions had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹1.6b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₹3.3b. In the meantime, we consider the stock very 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 example - Arvind Fashions has 1 warning sign we think you should be aware of.

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.