Is Bharat Road Network (NSE:BRNL) Using Too Much Debt?

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.' 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 note that Bharat Road Network Limited (NSE:BRNL) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bharat Road Network

How Much Debt Does Bharat Road Network Carry?

You can click the graphic below for the historical numbers, but it shows that Bharat Road Network had ₹14.1b of debt in March 2023, down from ₹16.2b, one year before. However, it does have ₹2.22b in cash offsetting this, leading to net debt of about ₹11.9b.

How Strong Is Bharat Road Network's Balance Sheet?

According to the last reported balance sheet, Bharat Road Network had liabilities of ₹7.18b due within 12 months, and liabilities of ₹15.9b due beyond 12 months. On the other hand, it had cash of ₹2.22b and ₹1.09b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹19.8b.

The deficiency here weighs heavily on the ₹2.89b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Bharat Road Network would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bharat Road Network'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.

In the last year Bharat Road Network wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to ₹3.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Bharat Road Network's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₹202m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹2.1b in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Bharat Road Network (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.

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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.