Here's Why Sindhu Trade Links (NSE:SINDHUTRAD) Can Afford Some 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.' 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. Importantly, Sindhu Trade Links Limited (NSE:SINDHUTRAD) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sindhu Trade Links

What Is Sindhu Trade Links's Net Debt?

As you can see below, Sindhu Trade Links had ₹9.55b of debt at December 2024, down from ₹10.3b a year prior. However, because it has a cash reserve of ₹1.55b, its net debt is less, at about ₹8.00b.

A Look At Sindhu Trade Links' Liabilities

According to the last reported balance sheet, Sindhu Trade Links had liabilities of ₹6.70b due within 12 months, and liabilities of ₹17.4b due beyond 12 months. On the other hand, it had cash of ₹1.55b and ₹6.06b worth of receivables due within a year. So it has liabilities totalling ₹16.5b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹24.6b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sindhu Trade Links 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 Sindhu Trade Links wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to ₹19b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Sindhu Trade Links produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹141m 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₹7.6b and the profit of ₹647m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For example, we've discovered 2 warning signs for Sindhu Trade Links (1 is a bit concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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