Stock Analysis

Here's Why Brand Concepts (NSE:BCONCEPTS) Can Afford Some Debt

NSEI:BCONCEPTS
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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.' 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. We note that Brand Concepts Limited (NSE:BCONCEPTS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Brand Concepts

What Is Brand Concepts's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Brand Concepts had debt of ₹239.8m, up from ₹215.3m in one year. However, it also had ₹11.7m in cash, and so its net debt is ₹228.1m.

debt-equity-history-analysis
NSEI:BCONCEPTS Debt to Equity History December 25th 2020

A Look At Brand Concepts's Liabilities

According to the last reported balance sheet, Brand Concepts had liabilities of ₹442.0m due within 12 months, and liabilities of ₹81.3m due beyond 12 months. Offsetting these obligations, it had cash of ₹11.7m as well as receivables valued at ₹367.2m due within 12 months. So it has liabilities totalling ₹144.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹204.8m. 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 you can't view debt in total isolation; since Brand Concepts will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Brand Concepts made a loss at the EBIT level, and saw its revenue drop to ₹418m, which is a fall of 50%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Brand Concepts's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹43m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of ₹84m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Brand Concepts (including 3 which shouldn't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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About NSEI:BCONCEPTS

Brand Concepts

Manufactures and retails bags, travel gear, and fashion accessories in India and internationally.

Moderate with adequate balance sheet.

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