India (NSE:PTC) has a somewhat strained balance sheet

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. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies PTC India Limited (NSE:PTC) uses debt. But the more important question is: what risk does this debt create?

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for India

What is India’s debt?

As you can see below, India had a debt of ₹94.2 billion in September 2021, up from ₹112.7 billion in the previous year. On the other hand, he has ₹12.9 billion in cash, resulting in a net debt of around ₹81.3 billion.

NSEI: PTC Debt History as of January 22, 2022

How strong is India’s balance sheet?

The latest balance sheet data shows that India had liabilities of ₹89.9 billion due within a year, and liabilities of ₹64.7 billion falling due thereafter. As compensation for these obligations, it had cash of ₹12.9 billion as well as receivables valued at ₹83.5 billion due within 12 months. Thus, its liabilities total ₹58.2 billion more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on society itself, like a child struggling under the weight of a huge backpack full of books, his sports gear and a trumpet. We would therefore be watching his balance sheet closely, no doubt. Ultimately, India would likely need a major recapitalization if its creditors demanded repayment.

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). Thus, we consider debt to earnings with and without amortization and depreciation expense.

While India’s debt to EBITDA ratio (4.4) suggests it is using some debt, its interest coverage is very low at 2.1, suggesting high leverage. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. More worryingly, India has seen its EBIT fall by 2.5% over the last twelve months. If he continues like this, paying off his debt will be like running on a treadmill – a lot of effort for little progress. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since India will need revenue 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.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, India 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

At first glance, India’s interest coverage 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 on the bright side, its EBIT to free cash flow conversion is a good sign and makes us more optimistic. Looking at the bigger picture, it seems clear to us that India’s use of debt creates risks for the business. If all goes well, this should boost returns, but on the other hand, the risk of permanent capital loss is increased by debt. 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. For example, we found 3 warning signs for India (1 cannot be ignored!) which you should be aware of before investing here.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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.

Julio V. Miller