Is Noida Toll Bridge (NSE:NOIDATOLL) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Noida Toll Bridge Company Limited (NSE:NOIDATOLL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Noida Toll Bridge

What Is Noida Toll Bridge's Debt?

As you can see below, Noida Toll Bridge had ₹178.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₹133.2m in cash, and so its net debt is ₹44.8m.

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 ₹943.7m falling due within a year, and liabilities of ₹358.4m due beyond that. Offsetting these obligations, it had cash of ₹133.2m as well as receivables valued at ₹55.6m due within 12 months. So it has liabilities totalling ₹1.11b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹1.17b, 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 you can't view debt in total isolation; since Noida Toll Bridge 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.

In the last year Noida Toll Bridge had a loss before interest and tax, and actually shrunk its revenue by 37%, to ₹149m. That makes us nervous, to say the least.

Caveat Emptor

While Noida Toll Bridge's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹358m. 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. For example, we would not want to see a repeat of last year's loss of ₹346m. So to be blunt we do think it is risky. 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 Noida Toll Bridge is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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