Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Century Textiles and Industries Limited (NSE: CENTURYTEX) uses debt. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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.
Check out our latest analysis for Century Textiles and Industries
What is Century Textiles and Industries’ net debt?
You can click on the graph below for historical figures, but it shows Century Textiles and Industries had 11.6 billion yen in debt in March 2021, up from 13.8 billion yen a year earlier. On the other hand, he has 1.90 billion yen in cash, resulting in net debt of around 9.72 billion yen.
How strong is Century Textiles and Industries’ balance sheet?
We can see from the most recent balance sheet that Century Textiles and Industries had liabilities of 14.9 billion yen due within one year and liabilities of 15.5 billion yen beyond. In return, he had 1.90 billion yen in cash and 1.59 billion yen in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 27.0 billion euros.
This deficit is not that big as Century Textiles and Industries is worth 64.0 billion yen, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Century Textiles and Industries will need revenue to repay this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Over the past year, Century Textiles and Industries has recorded a loss before interest and taxes and in fact reduced revenue by 24%, to £ 26 billion. To be frank, that doesn’t bode well.
While Century Textiles and Industries’ decline in revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Indeed, it lost 74 million euros at the EBIT level. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. Quite frankly, we think the record is far from up to par, although it could improve over time. We’d be better off if he turned his year-over-year loss of 119 million yen into a profit. In the meantime, we consider the title to be very risky. For riskier companies like Century Textiles and Industries, I always like to keep an eye out for long-term profit and income trends. Fortunately, you can click to view our interactive graph of its operating profit, revenue and cash flow.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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