Share Dilution

We think Sharda Motor Industries (NSE:SHARDAMOTR) can stay on top of its debt

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. 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. Like many other companies Sharda Motor Industries Limited (NSE: SHARDAMOTR) uses debt. But does this debt worry shareholders?

Why is debt risky?

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. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. 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 step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Sharda Motor Industries

What is Sharda Motor Industries net debt?

You can click on the graph below for historical figures, but it shows that in September 2021, Sharda Motor Industries had a debt of ₹125.4 million, an increase from ₹105.6 million, on a year. But he also has ₹2.86 billion in cash to offset this, meaning he has a net cash of ₹2.74 billion.

NSEI: SHARDAMOTR Debt to Equity History March 10, 2022

A look at the responsibilities of Sharda Motor Industries

According to the latest published balance sheet, Sharda Motor Industries had liabilities of ₹4.39 billion due within 12 months and liabilities of ₹184.0 million due beyond 12 months. In return, he had ₹2.86 billion in cash and ₹2.85 billion in receivables due within 12 months. It can therefore boast of having ₹1.14 billion in liquid assets more than total Passives.

This short-term liquidity is a sign that Sharda Motor Industries could probably service its debt easily, as its balance sheet is far from stretched. Simply put, the fact that Sharda Motor Industries has more cash than debt is arguably a good indication that it can safely manage its debt.

Even better, Sharda Motor Industries increased its EBIT by 170% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Sharda Motor Industries that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, while the taxman may love accounting profits, lenders only accept cash. Although Sharda Motor Industries has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s growing. builds (or erodes) cash balance. Over the past three years, Sharda Motor Industries has created free cash flow of 17% of its EBIT, an uninspiring performance. For us, such a low cash conversion creates a bit of paranoia about the ability to extinguish the debt.

Abstract

While it is always a good idea to investigate a company’s debt, in this case Sharda Motor Industries has ₹2.74 billion in net cash and a decent balance sheet. And it has impressed us with its 170% EBIT growth over the past year. So is Sharda Motor Industries’ debt a risk? This does not seem to us to be the case. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive chart of Sharda Motor Industries’ historical earnings per share for free.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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.