Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Prozone Intu Properties Limited (NSE:PROZONINTU) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Prozone Intu Properties
What Is Prozone Intu Properties's Net Debt?
As you can see below, Prozone Intu Properties had ₹3.32b of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. And it doesn't have much cash, so its net debt is about the same.
How Strong Is Prozone Intu Properties's Balance Sheet?
We can see from the most recent balance sheet that Prozone Intu Properties had liabilities of ₹2.15b falling due within a year, and liabilities of ₹3.90b due beyond that. On the other hand, it had cash of ₹37.5m and ₹406.2m worth of receivables due within a year. So it has liabilities totalling ₹5.60b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₹3.27b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, Prozone Intu Properties 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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).