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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Minda Corporation Limited (NSE:MINDACORP) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Minda
What Is Minda's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Minda had ₹5.16b of debt in March 2019, down from ₹7.23b, one year before. On the flip side, it has ₹3.81b in cash leading to net debt of about ₹1.35b.
A Look At Minda's Liabilities
We can see from the most recent balance sheet that Minda had liabilities of ₹10.8b falling due within a year, and liabilities of ₹1.90b due beyond that. On the other hand, it had cash of ₹3.81b and ₹5.49b worth of receivables due within a year. So its liabilities total ₹3.37b more than the combination of its cash and short-term receivables.
Since publicly traded Minda shares are worth a total of ₹19.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.
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.
Looking at its net debt to EBITDA of 0.49 and interest cover of 4.2 times, it seems to us that Minda is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Notably Minda's EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Minda 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.