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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Security and Intelligence Services (India) Limited (NSE:SIS) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Security and Intelligence Services (India)
What Is Security and Intelligence Services (India)'s Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Security and Intelligence Services (India) had ₹9.75b of debt, an increase on ₹5.57b, over one year. However, because it has a cash reserve of ₹4.40b, its net debt is less, at about ₹5.34b.
How Strong Is Security and Intelligence Services (India)'s Balance Sheet?
According to the last reported balance sheet, Security and Intelligence Services (India) had liabilities of ₹14.3b due within 12 months, and liabilities of ₹15.4b due beyond 12 months. Offsetting this, it had ₹4.40b in cash and ₹14.2b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹11.2b.
Of course, Security and Intelligence Services (India) has a market capitalization of ₹56.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
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.