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 note that Seya Industries Limited (NSE:SEYAIND) has debt on its balance sheet. But the more important question is: what risk does this debt create?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business has is to look at its cash flow and debt together.
See our latest analysis for Seya Industries
What is Seya Industries net debt?
As you can see below, Seya Industries had a debt of ₹7.67 billion in March 2022, up from ₹8.22 billion in the previous year. And he doesn’t have a lot of cash, so his net debt is about the same.
How strong is Seya Industries’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Seya Industries had liabilities of ₹950.3 million due within 12 months and liabilities of ₹7.05 billion due beyond. On the other hand, it had cash of ₹21.5 million and ₹340.2 million in receivables due within one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by ₹7.64 billion.
This deficit casts a shadow over the ₹676.2 million society like a colossus towering above mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Seya Industries would likely need a significant recapitalization if its creditors were to demand repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Seya Industries will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over 12 months, Seya Industries reported revenue of ₹733 million, a gain of 40%, despite reporting no earnings before interest and tax. With a little luck, the company will be able to progress towards profitability.
While we can certainly appreciate Seya Industries’ revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. To be precise, the EBIT loss amounted to ₹9.7 million. Reflecting on that and the large total liabilities, it’s hard to know what to say about the action due to our intense disaffinity for it. Like every long-shot, we’re sure it has a brilliant presentation outlining its blue-sky potential. But the reality is that it lacks liquid assets compared to liabilities, and it lost ₹63m last year. So we’re not very keen on owning this stock. It’s too risky for us. 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. Know that Seya Industries shows 3 warning signs in our investment analysis you should know…
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.