David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Century Textiles and Industries Limited (NSE:CENTURYTEX) is in debt. But does this debt worry shareholders?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Century Textiles and Industries
How much debt does Century Textiles and Industries have?
The image below, which you can click on for more details, shows that in March 2022, Century Textiles and Industries had a debt of ₹13.4 billion, up from ₹10.5 billion in a year. However, he has ₹1.90 billion in cash to offset this, resulting in a net debt of around ₹11.5 billion.
A look at the liabilities of Century Textiles and Industries
According to the latest published balance sheet, Century Textiles and Industries had liabilities of ₹28.4 billion due within 12 months and liabilities of ₹10.2 billion due beyond 12 months. As compensation for these obligations, it had cash of ₹1.90 billion as well as receivables valued at ₹3.03 billion due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by ₹33.7 billion.
This shortfall is not that bad as Century Textiles and Industries is worth ₹98.9 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 its ability to repay debt.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
We’d say Century Textiles and Industries’ moderate net debt to EBITDA ratio (2.4) is an indication of leverage caution. And its strong interest coverage of 12.5 times makes us even more comfortable. Notably, Century Textiles and Industries’ EBIT launched higher than Elon Musk, gaining a whopping 184% from a year ago. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Century Textiles and 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.
Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Century Textiles and Industries has had negative free cash flow, overall. Debt is much riskier for companies with unreliable free cash flow, so shareholders must hope that past spending will produce free cash flow in the future.
Our point of view
The ability of Century Textiles and Industries to cover its interest charges with its EBIT and its rate of growth in EBIT has reinforced our ability to manage its debt. But truth be told, his conversion from EBIT to free cash flow had us biting our nails. When you consider all of the items mentioned above, it seems to us that Century Textiles and Industries is managing its debt pretty well. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, Century Textiles and Industries has 2 warning signs (and 1 that shouldn’t be ignored) that we think you should know about.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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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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