Here's Why Sai Silks (Kalamandir) (NSE:KALAMANDIR) Can Manage Its Debt Responsibly

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. We note that Sai Silks (Kalamandir) Limited (NSE:KALAMANDIR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Sai Silks (Kalamandir)

What Is Sai Silks (Kalamandir)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Sai Silks (Kalamandir) had ₹5.20b of debt, an increase on ₹3.45b, over one year. But it also has ₹6.80b in cash to offset that, meaning it has ₹1.60b net cash.

A Look At Sai Silks (Kalamandir)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Sai Silks (Kalamandir) had liabilities of ₹6.56b due within 12 months and liabilities of ₹2.47b due beyond that. On the other hand, it had cash of ₹6.80b and ₹391.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.84b.

Given Sai Silks (Kalamandir) has a market capitalization of ₹29.5b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sai Silks (Kalamandir) boasts net cash, so it's fair to say it does not have a heavy debt load!

We saw Sai Silks (Kalamandir) grow its EBIT by 4.0% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sai Silks (Kalamandir)'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sai Silks (Kalamandir) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Sai Silks (Kalamandir) created free cash flow amounting to 2.4% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sai Silks (Kalamandir) has ₹1.60b in net cash. On top of that, it increased its EBIT by 4.0% in the last twelve months. So we are not troubled with Sai Silks (Kalamandir)'s debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sai Silks (Kalamandir)'s earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.