Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Brand Concepts Limited (NSE:BCONCEPTS) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Brand Concepts
What Is Brand Concepts's Net Debt?
The chart below, which you can click on for greater detail, shows that Brand Concepts had ₹234.6m in debt in March 2019; about the same as the year before. However, it does have ₹15.6m in cash offsetting this, leading to net debt of about ₹219.0m.
How Healthy Is Brand Concepts's Balance Sheet?
The latest balance sheet data shows that Brand Concepts had liabilities of ₹476.5m due within a year, and liabilities of ₹48.8m falling due after that. Offsetting these obligations, it had cash of ₹15.6m as well as receivables valued at ₹464.8m due within 12 months. So its liabilities total ₹44.9m more than the combination of its cash and short-term receivables.
Of course, Brand Concepts has a market capitalization of ₹348.7m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).