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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Bannari Amman Sugars Limited (NSE:BANARISUG) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. 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 Bannari Amman Sugars
What Is Bannari Amman Sugars's Net Debt?
As you can see below, at the end of March 2019, Bannari Amman Sugars had ₹7.37b of debt, up from ₹5.34b a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.
How Strong Is Bannari Amman Sugars's Balance Sheet?
We can see from the most recent balance sheet that Bannari Amman Sugars had liabilities of ₹7.51b falling due within a year, and liabilities of ₹2.56b due beyond that. On the other hand, it had cash of ₹41.8m and ₹1.35b worth of receivables due within a year. So its liabilities total ₹8.67b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Bannari Amman Sugars is worth ₹17.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
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.
Bannari Amman Sugars's debt is only 4.0 times its EBITDA, and its EBIT cover its interest expense 3.9 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Investors should also be troubled by the fact that Bannari Amman Sugars saw its EBIT drop by 19% over the last twelve months. If that's the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bannari Amman Sugars will need earnings to service that debt. 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.