Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu doesn’t care when he says, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Bhageria Industries Limited (NSE: BHAGERIA) uses debt in its activity. But does this debt concern shareholders?
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
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What is the net debt of Bhageria Industries?
The image below, which you can click for more details, shows that in March 2021, Bhageria Industries had a debt of 314.3 million yen, up from 206.8 million yen in a year. However, his balance sheet shows that he has £ 622.6million in cash, so he actually has £ 308.3million net.
How healthy is Bhageria Industries’ balance sheet?
The latest balance sheet data shows Bhageria Industries had ₹ 834.9million liabilities due within one year, and ₹ 396.5million liabilities due thereafter. In compensation for these obligations, it had cash of 622.6 million as well as receivables valued at 975.5 million at 12 months. Thus, it can boast of 366.7 million euros of liquid assets more than total Liabilities.
This surplus suggests that Bhageria Industries has a prudent balance sheet and could probably eliminate its debt without too much difficulty. Put simply, the fact that Bhageria Industries has more cash than debt is arguably a good indication that it can safely manage its debt.
The good news is that Bhageria Industries increased its EBIT by 4.1% year over year, which should allay concerns about debt repayment. There is no doubt that the balance sheet tells us the most about debt. But you can’t look at debt in isolation; since Bhageria Industries will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Bhageria Industries may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, Bhageria Industries’ free cash flow has stood at 46% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
While we sympathize with investors who find debt of concern, you should keep in mind that Bhageria Industries has net cash of 308.3 million yen, as well as more liquid assets than liabilities. In addition, it has increased its EBIT by 4.1% over the past twelve months. We are therefore not concerned with the use of debt by Bhageria Industries. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example – Bhageria Industries has 1 warning sign we think you should be aware.
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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