Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Zuari Industries Limited (NSE: ZUARIIND) uses debt in its business. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Zuari Industries
What is Zuari Industries net debt?
The image below, which you can click on for more details, shows that as of March 2022, Zuari Industries had a debt of ₹24.4 billion, up from ₹20.0 billion in a year. However, he has ₹3.39 billion in cash to offset this, resulting in a net debt of around ₹21.0 billion.
How strong is Zuari Industries’ balance sheet?
According to the latest published balance sheet, Zuari Industries had liabilities of ₹14.3 billion due within 12 months and liabilities of ₹18.6 billion due beyond 12 months. On the other hand, it had cash of ₹3.39 billion and ₹1.57 billion of receivables due within one year. It therefore has liabilities totaling ₹27.9 billion more than its cash and short-term receivables, combined.
This deficit casts a shadow over the ₹5.49 billion society like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Zuari Industries would likely need a significant recapitalization if its creditors demanded repayment. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Zuari Industries 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.
On a 12-month basis, Zuari Industries recorded a loss in EBIT and saw its revenue fall to ₹7.6 billion, a decline of 8.3%. We would much rather see growth.
Caveat Emptor
Over the past twelve months, Zuari Industries has posted a loss in earnings before interest and taxes (EBIT). Indeed, it lost ₹175 million in EBIT. Combining this information with the significant liabilities we have already discussed makes us very hesitant about this stock, to say the least. Of course, he may be able to improve his situation with a bit of luck and good execution. However, we note that last twelve months EBIT is worse than free cash flow of ₹407m and profit of ₹2.5bn. So there is undoubtedly potential for the company to change things. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 4 warning signs for Zuari Industries (2 are concerning) that you should be aware of.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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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