Here's Why Maheshwari Logistics (NSE:MAHESHWARI) Has A Meaningful Debt Burden

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. We can see that Maheshwari Logistics Limited (NSE:MAHESHWARI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Maheshwari Logistics

What Is Maheshwari Logistics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Maheshwari Logistics had ₹1.91b of debt, an increase on ₹1.75b, over one year. However, because it has a cash reserve of ₹164.5m, its net debt is less, at about ₹1.75b.

How Healthy Is Maheshwari Logistics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maheshwari Logistics had liabilities of ₹2.13b due within 12 months and liabilities of ₹997.5m due beyond that. Offsetting this, it had ₹164.5m in cash and ₹1.48b in receivables that were due within 12 months. So its liabilities total ₹1.48b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹2.13b, so it does suggest shareholders should keep an eye on Maheshwari Logistics' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While we wouldn't worry about Maheshwari Logistics's net debt to EBITDA ratio of 3.5, we think its super-low interest cover of 1.7 times is a sign of high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Even more troubling is the fact that Maheshwari Logistics actually let its EBIT decrease by 5.1% over the last year. If it keeps going like that paying off its debt will be like running on a treadmill -- a lot of effort for not much advancement. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Maheshwari Logistics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Maheshwari Logistics created free cash flow amounting to 15% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Mulling over Maheshwari Logistics's attempt at covering its interest expense with its EBIT, we're certainly not enthusiastic. And even its level of total liabilities fails to inspire much confidence. Overall, we think it's fair to say that Maheshwari Logistics has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. 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 Maheshwari Logistics is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.