Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Repro India Limited (NSE: REPRO) uses debt in its business. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Repro India
What is Repro India’s net debt?
As you can see below, at the end of September 2021, Repro India had ₹1.44 billion in debt, up from ₹1.29 billion a year ago. Click on the image for more details. However, since he has a cash reserve of ₹46.7 million, his net debt is lower at around ₹1.39 billion.
A Look at Repro India’s Responsibilities
Zooming in on the latest balance sheet data, we can see that Repro India had liabilities of ₹1.46 billion due within 12 months and liabilities of ₹826.2 million due beyond. As compensation for these obligations, it had cash of ₹46.7 million as well as receivables valued at ₹874.2 million due within 12 months. Thus, its liabilities total ₹1.36 billion more than the combination of its cash and short-term receivables.
This shortfall is not that bad as Repro India is worth ₹5.40 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Repro India that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over 12 months, Repro India reported revenue of ₹2.4 billion, a gain of 51%, despite reporting no earnings before interest and tax. The shareholders probably have their fingers crossed that she can make a profit.
Caveat Emptor
Even though Repro India has managed to grow its revenue quite skillfully, the harsh truth is that it is losing money on the EBIT line. To be precise, the EBIT loss amounted to ₹137 million. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. Quite frankly, we think the track record falls short, although it could improve over time. For example, we would not like to see a repeat of last year’s ₹244 million loss. We therefore believe that this title is quite risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 4 warning signs with Repro India (at least 1 that cannot be ignored), and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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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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