Is Harrisons Malayalam (NSE:HARRMALAYA) Using Too Much Debt?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Harrisons Malayalam Limited (NSE:HARRMALAYA) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Harrisons Malayalam
How Much Debt Does Harrisons Malayalam Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Harrisons Malayalam had debt of ₹1.05b, up from ₹955.3m in one year. However, because it has a cash reserve of ₹136.7m, its net debt is less, at about ₹914.0m.
How Healthy Is Harrisons Malayalam's Balance Sheet?
According to the last reported balance sheet, Harrisons Malayalam had liabilities of ₹1.86b due within 12 months, and liabilities of ₹1.08b due beyond 12 months. Offsetting these obligations, it had cash of ₹136.7m as well as receivables valued at ₹182.8m due within 12 months. So it has liabilities totalling ₹2.62b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₹1.02b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Harrisons Malayalam would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Harrisons Malayalam's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Harrisons Malayalam actually shrunk its revenue by 5.9%, to ₹3.5b. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Harrisons Malayalam produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₹169m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through ₹134m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Harrisons Malayalam's profit, revenue, and operating cashflow have changed over the last few years.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
