Howard Marks put 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 every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We notice that Solar Industries India Limited (NSE: SOLARINDS) has debt on its balance sheet. But does this debt concern shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, 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, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Solar Industries India
What is the net debt of Solar Industries India?
As you can see below, Solar Industries India had a debt of 6.23 billion yen in March 2021, up from 7.08 billion yen the previous year. However, it has 2.44 billion yen in cash offsetting this, which leads to net debt of around 3.80 billion yen.
A look at the responsibilities of Solar Industries India
According to the latest published balance sheet, Solar Industries India had liabilities of 8.19 billion yen due within 12 months and liabilities of 5.68 billion yen due beyond 12 months. On the other hand, he had 2.44 billion yen in cash and 4.60 billion yen in receivables within a year. It therefore has liabilities totaling 6.84 billion yen more than its cash and short-term receivables combined.
Considering that the listed shares of Solar Industries India are worth a total of 144.7 billion yen, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Solar Industries India has a net debt of only 0.74 times EBITDA indicating that it is certainly not a reckless borrower. And it has 9.3 times interest coverage, which is more than enough. Another good sign is that Solar Industries India was able to increase its EBIT by 20% in twelve months, making it easier to repay debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Solar Industries India can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Solar Industries India has created a free cash flow of 19% of its EBIT, a performance without interest. This low level of cash conversion undermines its ability to manage and repay its debts.
Our point of view
Fortunately, Solar Industries India’s impressive EBIT growth rate means it has the upper hand over its debt. But frankly, we think his conversion from EBIT to free cash-flow shakes that impression a bit. Looking at all of the above factors together, it seems to us that Solar Industries India can manage its debt quite comfortably. On the plus side, this leverage can increase returns for shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. Over time, stock prices tend to follow earnings per share, so if you are interested in Solar Industries India, you may want to click here to view an interactive chart of its historical earnings per share.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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