These 4 metrics indicate that Brigade Enterprises (NSE:BRIGADE) is using debt a lot

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Brigade Companies Limited (NSE: BRIGADE) is in debt. But should shareholders worry about its use of debt?

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for Brigade Enterprises

What is Brigade Enterprises’ net debt?

As you can see below, Brigade Enterprises had ₹48.3 billion in debt, as of March 2022, which is about the same as the previous year. You can click on the graph for more details. However, he has ₹14.0 billion in cash to offset this, resulting in a net debt of around ₹34.3 billion.

NSEI:BRIGADE Debt to Equity June 23, 2022

A look at the responsibilities of Brigade Enterprises

According to the latest published balance sheet, Brigade Enterprises had liabilities of ₹75.9 billion due within 12 months and liabilities of ₹46.9 billion due beyond 12 months. On the other hand, it had a cash position of ₹14.0 billion and ₹5.17 billion in receivables due within a year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of ₹103.6 billion.

When you consider that this shortfall exceeds the company’s ₹98.9 billion market capitalization, you might well be inclined to take a close look at the balance sheet. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

While we’re not concerned about Brigade Enterprises’ net debt to EBITDA ratio of 4.5, we believe its extremely low interest coverage of 0.94x is a sign of high leverage. Shareholders should therefore probably be aware that interest charges seem to have had a real impact on the company lately. The good news is that Brigade Enterprises has grown its EBIT by 91% smoothly over the past twelve months. Like a mother’s loving embrace of a newborn, this kind of growth builds resilience, putting the company in a stronger position to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Brigade Enterprises can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Brigade Enterprises has recorded free cash flow of 77% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

While coverage of Brigade Enterprises interests makes us nervous. The EBIT growth rate and the conversion of EBIT to free cash flow are encouraging signs. Taking all the angles mentioned above, it seems to us that Brigade Enterprises is a bit of a risky investment due to its debt. This isn’t necessarily a bad thing, since leverage can increase return on equity, but it is something to be aware of. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, Brigade Enterprises has 3 warning signs (and 1 of concern) that we think you should know about.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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