Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Panache Digilife Limited (NSE:PANACHE) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Panache Digilife
What Is Panache Digilife's Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Panache Digilife had debt of ₹266.2m, up from ₹132.6m in one year. However, it also had ₹18.4m in cash, and so its net debt is ₹247.8m.
How Strong Is Panache Digilife's Balance Sheet?
According to the last reported balance sheet, Panache Digilife had liabilities of ₹567.4m due within 12 months, and liabilities of ₹79.7m due beyond 12 months. On the other hand, it had cash of ₹18.4m and ₹424.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹204.3m.
Panache Digilife has a market capitalization of ₹612.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.