Some say that volatility is the best way to think about risk as an investor, rather than liability, but Warren Buffett famously said, “Volatility is not synonymous with risk.” Debt is often incurred when a business goes bankrupt, so it makes sense to consider a company’s balance sheet when considering a company’s risks.be careful BSL Limited (NSE:BSL) has a liability on its balance sheet. But the bigger question is how much risk does that liability create?
What are the risks of borrowing?
Debt helps a business until it struggles to pay it back with either new capital or free cash flow. there is. But a more common (but still costly) situation is when a company has to dilute its shareholders with a cheap stock price just to manage its debt. Of course, many companies are using debt to fund their growth, but that doesn’t hurt. The first thing to do when considering how much debt a business is using is to look at cash and debt together.
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What is BSL Debt?
You can click the chart below for historical figures, but as of September 2022, we can see that BSL has a debt of Rs 21.9 crore, up from Rs 14.3 crore over the year. And since they don’t have much cash, their net debt is about the same.
How strong is BSL’s balance sheet?
The latest balance sheet data show that BSL has a debt of Rs 2,320 crore to be paid within one year, followed by a debt of Rs 765.2 crore to be paid. On the other hand, with cash of £7.94m he had accounts receivable within his one year worth of £945.2m. Therefore, in total his liabilities amount to Rs 2.13 billion, which is more than his cash and short-term receivables combined.
Given that this deficit is actually higher than the company’s Rs 1.82 crore market capitalization, shareholders should watch out for BSL’s debt levels like parents watching their children ride their first bikes. I think there is. In a scenario where the company had to clean up its balance sheet quickly, shareholders would likely suffer significant dilution.
By dividing net debt by earnings before interest, taxes, depreciation and amortization (EBITDA), and calculating how easily earnings before interest and taxes (EBIT) can cover earnings, a company’s Measure your debt load. Expenses (interest cover). The advantage of this approach is that it takes into account both the absolute amount of debt (net debt to EBITDA) and the actual interest expense associated with that debt (its interest coverage ratio).
BSL’s debt-to-EBITDA ratio (5.0) suggests it is using some debt, but its interest coverage is very weak at 2.3, suggesting high leverage. These days, it’s clear that the cost of borrowing money is having a negative impact on shareholder returns. BSL, on the other hand, grew EBIT by 25% last year. If this growth continues, the debt should evaporate like the shortage of drinking water during an unusually hot summer. Arguably, we learn the most about debt from the balance sheet. But it is BSL’s earnings that will affect how the balance sheet will hold up in the future. So if you want to learn more about earnings, it might be worth checking out this graph of long-term earnings trends.
Finally, tax officials may adore accounting benefits, but lenders only accept cold cash. So it’s clear that we need to see if that her EBIT is leading to corresponding free cash flow. Over the past three years, BSL has posted an aggregate negative free cash flow. Liabilities are usually higher and, in most cases, companies with negative free cash flow are more risky. Shareholders should want improvement.
our view
At first glance, BSL’s net debt to EBITDA was preliminary for the stock, and converting EBIT to free cash flow wasn’t as attractive as an empty restaurant on one of the busiest nights of the year. . But on the bright side, EBIT growth bodes well and makes us more optimistic. Overall, BSL’s balance sheet appears to be a significant risk to the business. Because of this, we are quite cautious about our stocks and believe that shareholders should pay attention to their liquidity. The balance sheet is clearly an area to focus on when analyzing liabilities. However, not all investment risks are on the balance sheet, far from it. Note that BSL is shown 5 warning signs in investment analysis and three of them make us uncomfortable…
Check this out if you’re interested in investing in a profitable business without debt. freedom List of growth companies with net cash on their balance sheets.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative materials. Is not …