These 4 measures indicate that Trident (NSE: TRIDENT) uses debt safely
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. Above all, Trident Limited (NSE: TRIDENT) is in debt. But should shareholders worry about its use of debt?
When is debt a problem?
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. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Trident
What is Trident’s debt?
The image below, which you can click on for more details, shows that as of September 2021, Trident had a debt of ₹13.3 billion, up from ₹8.95 billion in a year. However, since he has a cash reserve of ₹3.98 billion, his net debt is lower at around ₹9.29 billion.
How healthy is Trident’s balance sheet?
The latest balance sheet data shows that Trident had liabilities of ₹16.2 billion due within a year, and liabilities of ₹6.71 billion falling due thereafter. As compensation for these obligations, it had cash of ₹3.98 billion as well as receivables valued at ₹4.81 billion due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by ₹14.1 billion.
Considering that Trident has a market capitalization of ₹299.3 billion, it is hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Trident’s net debt is only 0.67 times its EBITDA. And its EBIT easily covers its interest charges, which is 13.7 times the size. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Even more impressive is that Trident increased its EBIT by 168% year-over-year. This boost will make it even easier to pay off debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Trident’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Trident has recorded free cash flow of 70% 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, Trident’s impressive interest coverage means it has the upper hand on its debt. And this is only the beginning of good news since its EBIT growth rate is also very encouraging. Overall, we don’t think Trident is taking bad risks, as its leverage looks modest. The balance sheet therefore seems rather healthy to us. 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 3 warning signs with Trident, and understanding them should be part of your investment process.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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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.