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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Zenith Exports Limited (NSE:ZENITHEXPO) makes use of debt. But is this debt a concern to shareholders?
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. 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. 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.
Check out our latest analysis for Zenith Exports
What Is Zenith Exports's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Zenith Exports had debt of ₹167.6m, up from ₹113.0m in one year. However, because it has a cash reserve of ₹138.4m, its net debt is less, at about ₹29.2m.
A Look At Zenith Exports's Liabilities
The latest balance sheet data shows that Zenith Exports had liabilities of ₹247.7m due within a year, and liabilities of ₹25.2m falling due after that. On the other hand, it had cash of ₹138.4m and ₹198.7m worth of receivables due within a year. So it can boast ₹64.2m more liquid assets than total liabilities.
This surplus suggests that Zenith Exports is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zenith Exports will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Zenith Exports reported revenue of ₹966m, which is a gain of 2.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.