Noida Toll Bridge (NSE:NOIDATOLL) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Noida Toll Bridge Company Limited (NSE:NOIDATOLL) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Noida Toll Bridge

What Is Noida Toll Bridge's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Noida Toll Bridge had ₹780.0m of debt, an increase on ₹652.1m, over one year. However, it also had ₹129.5m in cash, and so its net debt is ₹650.5m.

How Healthy Is Noida Toll Bridge's Balance Sheet?

According to the last reported balance sheet, Noida Toll Bridge had liabilities of ₹1.24b due within 12 months, and liabilities of ₹70.9m due beyond 12 months. Offsetting these obligations, it had cash of ₹129.5m as well as receivables valued at ₹107.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.08b.

This is a mountain of leverage relative to its market capitalization of ₹1.31b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Noida Toll Bridge made a loss at the EBIT level, and saw its revenue drop to ₹129m, which is a fall of 48%. To be frank that doesn't bode well.

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. Indeed, it lost a very considerable ₹399m at the EBIT level. 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. However, it doesn't help that it burned through ₹11m of cash over the last year. So to be blunt we think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Noida Toll Bridge (of which 1 is potentially serious!) 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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