Is Arvind Fashions (NSE:ARVINDFASN) Using Debt Sensibly?

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 is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Arvind Fashions

How Much Debt Does Arvind Fashions Carry?

The image below, which you can click on for greater detail, shows that Arvind Fashions had debt of ₹10.6b at the end of September 2020, a reduction from ₹11.3b over a year. On the flip side, it has ₹1.30b in cash leading to net debt of about ₹9.28b.

How Strong Is Arvind Fashions' Balance Sheet?

We can see from the most recent balance sheet that Arvind Fashions had liabilities of ₹23.4b falling due within a year, and liabilities of ₹10.3b due beyond that. Offsetting these obligations, it had cash of ₹1.30b as well as receivables valued at ₹5.80b due within 12 months. So it has liabilities totalling ₹26.6b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹15.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Arvind Fashions would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Arvind Fashions made a loss at the EBIT level, and saw its revenue drop to ₹25b, which is a fall of 44%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Arvind Fashions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹4.4b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₹2.3b in negative free cash flow over the last year. That means it's on the risky side of things. 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 3 warning signs for Arvind Fashions you should be aware of, and 1 of them is a bit concerning.

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. 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.
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