These 4 metrics indicate that Black Box (NSE:BBOX) is using debt a lot
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. 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 Limited black box (NSE:BBOX) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. 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.
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What is Black Box’s debt?
As you can see below, at the end of March 2022, Black Box had a debt of ₹4.81 billion, up from ₹2.88 billion a year ago. Click on the image for more details. However, since he has a cash reserve of ₹3.11 billion, his net debt is lower at around ₹1.69 billion.
How healthy is Black Box’s balance sheet?
We can see from the most recent balance sheet that Black Box had liabilities of ₹19.1 billion due in one year, and liabilities of ₹4.77 billion due beyond. As compensation for these obligations, it had cash of ₹3.11 billion as well as receivables valued at ₹9.14 billion due within 12 months. It therefore has liabilities totaling ₹11.6 billion more than its cash and short-term receivables, combined.
This shortfall is not that bad as Black Box is worth ₹24.3 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without 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.
Given its net debt to EBITDA ratio of 0.80 and interest coverage of 4.5x, it seems to us that Black Box is probably using debt fairly reasonably. But the interest payments are certainly enough to make us think about the affordability of its debt. Shareholders should know that Black Box’s EBIT fell 37% last year. If this earnings trend continues, paying off debt will be about as easy as herding cats on a roller coaster. There is no doubt that we learn the most about debt from the balance sheet. But it’s Black Box’s earnings that will influence the balance sheet going forward. 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 therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Black Box has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Black Box’s EBIT growth rate and interest coverage are definitely weighing on it, in our view. But its conversion of EBIT to free cash flow tells a very different story and suggests some resilience. Looking at all the angles mentioned above, it seems to us that Black Box is a bit of a risky investment due to its leverage. This isn’t necessarily a bad thing, since leverage can increase return on equity, but it is something to be aware of. 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, we found 4 warning signs for Black Box (1 cannot be ignored!) which you should be aware of before investing here.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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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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