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. Above all, Poddar Housing and Development Limited (NSE: PODDARHOUS) is in debt. But should shareholders worry about its use of debt?

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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for Poddar Housing and Development

How much debt does Poddar Housing and Development have?

You can click on the graph below for historical figures, but it shows that in September 2021, Poddar Housing and Development had a debt of ₹3.04 billion, an increase from ₹2.60 billion, over a year. However, since he has a cash reserve of ₹80.5 million, his net debt is lower at around ₹2.96 billion.

How healthy is Poddar Housing and Development’s balance sheet?

We can see from the most recent balance sheet that Poddar Housing and Development had liabilities of ₹1.72 billion maturing within a year, and liabilities of ₹2.98 billion beyond that. On the other hand, it had cash of ₹80.5 million and ₹58.9 million of receivables due within one year. It therefore has liabilities totaling ₹4.55 billion more than its cash and short-term receivables, combined.

The deficiency here weighs heavily on the ₹1.40 billion business itself, like a child struggling under the weight of a huge backpack full of books, his sports gear and a trumpet . So we definitely think shareholders need to watch this one closely. After all, Poddar Housing and Development would likely need a major recapitalization if it were to pay its creditors today.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

A low interest coverage of 0.38x and an extremely high net debt to EBITDA ratio of 55.1 shook our confidence in Poddar Housing and Development like a punch in the gut. This means that we would consider him to be heavily indebted. However, the silver lining was that Poddar Housing and Development achieved a positive EBIT of ₹46m in the last twelve months, an improvement from the loss in the previous year. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Poddar Housing and Development that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Over the past year, Poddar Housing and Development has experienced substantial negative free cash flow, overall. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

At first glance, Poddar Housing and Development’s conversion of EBIT to free cash flow left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant the night before. busiest of the year. That said, its ability to grow its EBIT is not such a concern. We think the chances of Poddar Housing and Development having too much debt are very high. For us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel otherwise. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Poddar Housing and Development (1 of which is a little unpleasant!) that you should know about.

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% free, at 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.