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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. Importantly, Autoline Industries Limited (NSE:AUTOIND) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Autoline Industries
How Much Debt Does Autoline Industries Carry?
The image below, which you can click on for greater detail, shows that Autoline Industries had debt of ₹1.27b at the end of March 2019, a reduction from ₹1.93b over a year. However, it does have ₹49.5m in cash offsetting this, leading to net debt of about ₹1.23b.
A Look At Autoline Industries's Liabilities
We can see from the most recent balance sheet that Autoline Industries had liabilities of ₹2.68b falling due within a year, and liabilities of ₹889.7m due beyond that. Offsetting this, it had ₹49.5m in cash and ₹909.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.61b.
This deficit casts a shadow over the ₹717.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Autoline Industries would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Autoline Industries's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.