Snowman Logistics (NSE:SNOWMAN) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Snowman Logistics Limited (NSE:SNOWMAN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Snowman Logistics

How Much Debt Does Snowman Logistics Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Snowman Logistics had debt of ₹845.3m, up from ₹618.0m in one year. However, because it has a cash reserve of ₹463.6m, its net debt is less, at about ₹381.7m.

A Look At Snowman Logistics' Liabilities

We can see from the most recent balance sheet that Snowman Logistics had liabilities of ₹421.9m falling due within a year, and liabilities of ₹2.05b due beyond that. Offsetting these obligations, it had cash of ₹463.6m as well as receivables valued at ₹524.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.48b.

Since publicly traded Snowman Logistics shares are worth a total of ₹8.30b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

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.

Snowman Logistics has a very low debt to EBITDA ratio of 0.59 so it is strange to see weak interest coverage, with last year's EBIT being only 0.94 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. Importantly, Snowman Logistics grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Snowman Logistics 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Snowman Logistics actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

The good news is that Snowman Logistics's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its interest cover. Zooming out, Snowman Logistics seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. For instance, we've identified 1 warning sign for Snowman Logistics that you should be aware of.

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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