Here’s why Apex Frozen Foods (NSE:APEX) has significant debt

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. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Apex Frozen Foods Limited (NSE:APEX) has debt on its balance sheet. But does this debt worry shareholders?

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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

See our latest review for Apex Frozen Foods

How much debt does Apex Frozen Foods have?

As you can see below, at the end of September 2021, Apex Frozen Foods had ₹1.83 billion in debt, up from ₹1.75 billion a year ago. Click on the image for more details. However, he has ₹128.4 million in cash to offset this, resulting in a net debt of around ₹1.71 billion.

NSEI: APEX Debt to Equity February 25, 2022

How healthy is Apex Frozen Foods’ balance sheet?

The latest balance sheet data shows that Apex Frozen Foods had liabilities of ₹2.27 billion due within a year, and liabilities of ₹277.6 million falling due thereafter. In return, he had ₹128.4 million in cash and ₹1.82 billion in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of ₹596.1 million.

Of course, Apex Frozen Foods has a market cap of ₹7.93 billion, so those liabilities are probably manageable. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Apex Frozen Foods’ net debt is at a very reasonable 1.9 times its EBITDA, while its EBIT covered its interest expense at just 4.0 times last year. While these numbers don’t alarm us, it’s worth noting that the company’s cost of debt has a real impact. It is important to note that Apex Frozen Foods’ EBIT has remained essentially stable over the last twelve months. Ideally, it can reduce its debt by reviving its earnings growth. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; because Apex Frozen Foods will need revenue to pay off that debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Apex Frozen Foods has recorded free cash flow of 11% of its EBIT, which is really quite low. This low level of cash conversion compromises its ability to manage and repay its debt.

Our point of view

Apex Frozen Foods’ EBIT to free cash flow conversion was a real negative in this analysis, although the other factors we considered put it in a much better light. For example, its level of total liabilities is relatively high. Looking at all the angles mentioned above, it seems to us that Apex Frozen Foods is a somewhat risky investment due to its leverage. Not all risk is bad, as it can boost stock returns if it pays off, but this leverage risk is worth keeping in mind. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Apex Frozen Foods (1 of which is a little worrying!) that you should know about.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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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