Here's Why Trent (NSE:TRENT) Has A Meaningful Debt Burden

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Trent Limited (NSE:TRENT) 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Trent

What Is Trent's Net Debt?

As you can see below, at the end of March 2022, Trent had ₹4.97b of debt, up from ₹3.00b a year ago. Click the image for more detail. But on the other hand it also has ₹6.08b in cash, leading to a ₹1.11b net cash position.

How Strong Is Trent's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Trent had liabilities of ₹6.53b due within 12 months and liabilities of ₹46.6b due beyond that. Offsetting these obligations, it had cash of ₹6.08b as well as receivables valued at ₹1.76b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹45.3b.

Given Trent has a market capitalization of ₹381.5b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Trent boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Trent made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹2.6b in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Trent'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 company can only pay off debt with cold hard cash, not accounting profits. While Trent 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. During the last year, Trent burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While Trent does have more liabilities than liquid assets, it also has net cash of ₹1.11b. So although we see some areas for improvement, we're not too worried about Trent's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Trent you should be aware of.

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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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.