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Warren Buffett famously said, '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. Importantly, India Glycols Limited (NSE:INDIAGLYCO) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for India Glycols
What Is India Glycols's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 India Glycols had ₹10.0b of debt, an increase on ₹8.34b, over one year. However, because it has a cash reserve of ₹657.2m, its net debt is less, at about ₹9.35b.
A Look At India Glycols's Liabilities
According to the last reported balance sheet, India Glycols had liabilities of ₹17.2b due within 12 months, and liabilities of ₹11.0b due beyond 12 months. Offsetting these obligations, it had cash of ₹657.2m as well as receivables valued at ₹3.83b due within 12 months. So it has liabilities totalling ₹23.7b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₹7.48b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, India Glycols would probably need a major re-capitalization if its creditors were to demand repayment.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
India Glycols's net debt is sitting at a very reasonable 2.1 times its EBITDA, while its EBIT covered its interest expense just 3.3 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. It is well worth noting that India Glycols's EBIT shot up like bamboo after rain, gaining 33% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if India Glycols can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.