These 4 Measures Indicate That Sirca Paints India (NSE:SIRCA) Is Using Debt Extensively

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Sirca Paints India Limited (NSE:SIRCA) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sirca Paints India

What Is Sirca Paints India's Debt?

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.

A Look At Sirca Paints India's Liabilities

Zooming in on the latest balance sheet data, we can see that Sirca Paints India had liabilities of ₹370.8m due within 12 months and liabilities of ₹2.02m due beyond that. Offsetting these obligations, it had cash of ₹707.4m as well as receivables valued at ₹399.3m due within 12 months. So it actually has ₹734.0m 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. Succinctly put, Sirca Paints India boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Sirca Paints India if management cannot prevent a repeat of the 59% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sirca Paints India 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sirca Paints India has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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 it is always sensible to investigate a company's debt, in this case Sirca Paints India has ₹532.8m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Sirca Paints India's balance sheet. 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. Be aware that Sirca Paints India is showing 4 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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