David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that Bartronics India Limited (NSE: BARTRONICS) uses debt in its business. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Bartronics India
What is the debt of Bartronics India?
As you can see below, Bartronics India had 3.71 billion yen in debt in September 2021, up from 11.2 billion yen the previous year. However, given that it has a cash reserve of 130.8 million yen, its net debt is less, at around 3.58 billion yen.
How healthy is Bartronics India’s balance sheet?
The latest balance sheet data shows Bartronics India had liabilities of 15.2 billion yen due within one year, and liabilities of 83,000 yen maturing after that. In return, he had 130.8 million yen in cash and 10.6 billion yen in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 4.40 billion euros.
This deficit casts a shadow over the 220.3 million yen society like a towering colossus of mere mortals. So we would be watching its record closely, without a doubt. Ultimately, Bartronics India would likely need a major recapitalization if its creditors demanded repayment.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization expenses.
Bartronics India shareholders face the double whammy of a high net debt / EBITDA ratio (64.1) and fairly low interest coverage, since EBIT is only 0.025 times the expenses of interests. This means that we would consider him to be in heavy debt. However, the bright side is that Bartronics India achieved a positive EBIT of 13 million euros over the past twelve months, an improvement over the loss of the previous year. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Bartronics India will need revenue to service this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business can only repay its debts with hard cash, not with book profits. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) is supported by free cash flow. Over the past year, Bartronics India has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
At first glance, Bartronics India’s interest hedging left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night of the year. But on the bright side, its conversion from EBIT to free cash flow is a good sign and makes us more optimistic. We are pretty clear that we consider Bartronics India to be really quite risky, due to the health of its balance sheet. For this reason, we are quite cautious on the stock, and we believe that shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Bartronics India has 2 warning signs (and 1 which is potentially serious) we think you should be aware of.
If you want to invest in businesses that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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