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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. Importantly, The Bombay Dyeing and Manufacturing Company Limited (NSE:BOMDYEING) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Bombay Dyeing and Manufacturing
What Is Bombay Dyeing and Manufacturing's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Bombay Dyeing and Manufacturing had debt of ₹39.7b, up from ₹28.0b in one year. And it doesn't have much cash, so its net debt is about the same.
How Strong Is Bombay Dyeing and Manufacturing's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Bombay Dyeing and Manufacturing had liabilities of ₹16.0b due within 12 months and liabilities of ₹34.0b due beyond that. Offsetting these obligations, it had cash of ₹362.7m as well as receivables valued at ₹10.9b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹38.7b.
This deficit casts a shadow over the ₹17.9b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Bombay Dyeing and Manufacturing would likely require a major re-capitalisation if it had to pay its creditors today.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.