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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 Aspinwall and Company Limited (NSE:ASPINWALL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Aspinwall
What Is Aspinwall's Net Debt?
As you can see below, Aspinwall had ₹673.9m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of ₹92.5m, its net debt is less, at about ₹581.4m.
How Healthy Is Aspinwall's Balance Sheet?
According to the last reported balance sheet, Aspinwall had liabilities of ₹1.06b due within 12 months, and liabilities of ₹93.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹92.5m as well as receivables valued at ₹470.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹595.2m.
This deficit isn't so bad because Aspinwall is worth ₹1.07b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.