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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Hisar Metal Industries Limited (NSE:HISARMETAL) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Hisar Metal Industries
What Is Hisar Metal Industries's Net Debt?
As you can see below, Hisar Metal Industries had ₹620.7m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. On the flip side, it has ₹62.2m in cash leading to net debt of about ₹558.5m.
A Look At Hisar Metal Industries's Liabilities
According to the last reported balance sheet, Hisar Metal Industries had liabilities of ₹693.7m due within 12 months, and liabilities of ₹210.7m due beyond 12 months. Offsetting these obligations, it had cash of ₹62.2m as well as receivables valued at ₹406.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹435.3m.
This deficit casts a shadow over the ₹287.9m 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, Hisar Metal Industries would probably need a major re-capitalization if its creditors were to demand repayment.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.