Sirca Paints India (NSE:SIRCA) Has A Somewhat Strained Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Sirca Paints India Limited (NSE:SIRCA) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Sirca Paints India

How Much Debt Does Sirca Paints India Carry?

As you can see below, at the end of September 2020, Sirca Paints India had ₹174.6m of debt, up from ₹113.0k a year ago. Click the image for more detail. However, it does have ₹707.4m in cash offsetting this, leading to net cash of ₹532.8m.

How Healthy Is Sirca Paints India's Balance Sheet?

We can see from the most recent balance sheet that Sirca Paints India had liabilities of ₹370.8m falling due within a year, and liabilities of ₹2.02m due beyond that. Offsetting these obligations, it had cash of ₹707.4m as well as receivables valued at ₹464.5m due within 12 months. So it actually has ₹799.2m more liquid assets than total liabilities.

This surplus suggests that Sirca Paints India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sirca Paints India has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Sirca Paints India's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Sirca Paints India's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sirca Paints India 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. Over the last three years, Sirca Paints India saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sirca Paints India has net cash of ₹532.8m, as well as more liquid assets than liabilities. So while Sirca Paints India does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 4 warning signs for Sirca Paints India you should be aware of, and 1 of them is concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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