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.' 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 Praxis Home Retail Limited (NSE:PRAXIS) makes use of debt. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Praxis Home Retail Carry?
As you can see below, Praxis Home Retail had ₹713.4m of debt at September 2022, down from ₹911.0m a year prior. However, because it has a cash reserve of ₹23.6m, its net debt is less, at about ₹689.9m.
How Healthy Is Praxis Home Retail's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Praxis Home Retail had liabilities of ₹2.79b due within 12 months and liabilities of ₹695.0m due beyond that. Offsetting these obligations, it had cash of ₹23.6m as well as receivables valued at ₹60.0m due within 12 months. So its liabilities total ₹3.40b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's ₹2.38b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Praxis Home Retail will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Praxis Home Retail wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to ₹4.5b. With any luck the company will be able to grow its way to profitability.
While we can certainly appreciate Praxis Home Retail's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable ₹425m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of ₹105m and free cash flow of ₹467m. So there is definitely a chance that it can improve things in the next few years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Praxis Home Retail has 3 warning signs we think you should be aware of.
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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