Is Noida Toll Bridge (NSE:NOIDATOLL) A Risky Investment?

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.' 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 Noida Toll Bridge Company Limited (NSE:NOIDATOLL) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Noida Toll Bridge

What Is Noida Toll Bridge's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Noida Toll Bridge had ₹667.1m of debt in March 2022, down from ₹780.0m, one year before. However, it also had ₹146.9m in cash, and so its net debt is ₹520.2m.

How Healthy Is Noida Toll Bridge's Balance Sheet?

We can see from the most recent balance sheet that Noida Toll Bridge had liabilities of ₹1.25b falling due within a year, and liabilities of ₹70.1m due beyond that. On the other hand, it had cash of ₹146.9m and ₹84.3m worth of receivables due within a year. So its liabilities total ₹1.09b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹1.66b, so it does suggest shareholders should keep an eye on Noida Toll Bridge's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Noida Toll Bridge'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.

Over 12 months, Noida Toll Bridge reported revenue of ₹214m, which is a gain of 63%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Noida Toll Bridge still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₹397m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹387m into a profit. So we do think this stock is quite risky. 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. For example Noida Toll Bridge has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.