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.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Nagreeka Exports Limited (NSE:NAGREEKEXP) uses debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies 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.
Check out our latest analysis for Nagreeka Exports
What is Nagreeka’s export debt?
The image below, which you can click on for more details, shows that Nagreeka Exports had debt of ₹1.91 billion at the end of March 2022, a reduction from ₹2.10 billion year on year. Net debt is about the same, since she doesn’t have a lot of cash.
How strong is Nagreeka Exports’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Nagreeka Exports had liabilities of ₹1.75 billion due within 12 months and liabilities of ₹614.2 million due beyond. In return, he had ₹29.7 million in cash and ₹203.5 million in receivables due within 12 months. It therefore has liabilities totaling ₹2.14 billion more than its cash and short-term receivables, combined.
This deficit casts a shadow over the ₹455.0 million society like a colossus towering above mere mortals. So we definitely think shareholders need to watch this one closely. After all, Nagreeka Exports would probably need a major recapitalization if it had to pay its creditors today.
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.
A low interest coverage of 1.5x and an extremely high net debt to EBITDA ratio of 6.7 shook our confidence in Nagreeka Exports like a punch in the gut. The debt burden here is considerable. However, shareholders should be reassured to remember that Nagreeka Exports has actually increased its EBIT by 52,424% over the past 12 months. If this earnings trend continues, it will make its leverage much more manageable in the future. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Nagreeka Exports will need income to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, while the taxman may love accounting profits, lenders only accept cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Nagreeka Exports has recorded free cash flow of 52% 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
At first glance, Nagreeka Exports’ net debt to EBITDA left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the busiest night of the year. . But at least it’s decent enough to increase its EBIT; it’s encouraging. Overall, we think it’s fair to say that Nagreeka Exports has enough debt that there are real risks around the balance sheet. If all goes well, it can pay off, but the downside of this debt is a greater risk of permanent losses. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – Nagreeka Exports has 3 warning signs we think you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.