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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Sudarshan Chemical Industries Limited (NSE:SUDARSCHEM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Sudarshan Chemical Industries
How Much Debt Does Sudarshan Chemical Industries Carry?
The image below, which you can click on for greater detail, shows that Sudarshan Chemical Industries had debt of ₹3.67b at the end of March 2019, a reduction from ₹4.32b over a year. Net debt is about the same, since the it doesn't have much cash.
How Strong Is Sudarshan Chemical Industries's Balance Sheet?
According to the last reported balance sheet, Sudarshan Chemical Industries had liabilities of ₹6.07b due within 12 months, and liabilities of ₹1.85b due beyond 12 months. Offsetting this, it had ₹49.6m in cash and ₹3.71b in receivables that were due within 12 months. So it has liabilities totalling ₹4.16b more than its cash and near-term receivables, combined.
Since publicly traded Sudarshan Chemical Industries shares are worth a total of ₹22.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.