Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Plastiblends India Limited (NSE:PLASTIBLEN) is in debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for Plastiblends India
What is Plastiblends India’s debt?
The graph below, which you can click on for more details, shows that Plastiblends India had a debt of ₹326.8 million in March 2022; about the same as the previous year. However, he has ₹78.0 million of cash to offset this, resulting in a net debt of around ₹248.9 million.
How healthy is Plastiblends India’s balance sheet?
We can see from the most recent balance sheet that Plastiblends India had liabilities of ₹919.3m due within a year, and liabilities of ₹440.0m due beyond. As compensation for these obligations, it had cash of ₹78.0 million as well as receivables valued at ₹1.20 billion due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of ₹85.3 million.
This situation indicates that Plastiblends India’s balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. It is therefore highly unlikely that the ₹5.35bn company will run out of cash, but it is still worth keeping an eye on the balance sheet.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Plastiblends India has a low net debt to EBITDA ratio of just 0.37. And its EBIT easily covers its interest charges, which is 16.8 times the size. So we’re pretty relaxed about his super-conservative use of debt. In contrast, Plastiblends India has seen its EBIT fall by 2.1% over the last twelve months. If earnings continue to decline at this rate, the company could find it increasingly difficult to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Plastiblends India will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Plastiblends India has recorded free cash flow of 58% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
Fortunately, Plastiblends India’s impressive interest coverage means it has the upper hand on its debt. But truth be told, we think its EBIT growth rate somewhat undermines that impression. When we consider the range of factors above, it seems that Plastiblends India is quite sensitive with its use of debt. While this carries some risk, it can also improve shareholder returns. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 2 warning signs for Plastiblends India you should be aware.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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