Is MRO-TEK Realty (NSE:MRO-TEK) Using Debt In A Risky Way?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that MRO-TEK Realty Limited (NSE:MRO-TEK) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for MRO-TEK Realty
How Much Debt Does MRO-TEK Realty Carry?
As you can see below, at the end of March 2019, MRO-TEK Realty had ₹294.7m of debt, up from ₹133.0m a year ago. Click the image for more detail. However, it also had ₹19.6m in cash, and so its net debt is ₹275.1m.
How Healthy Is MRO-TEK Realty's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that MRO-TEK Realty had liabilities of ₹443.6m due within 12 months and liabilities of ₹1.30m due beyond that. Offsetting this, it had ₹19.6m in cash and ₹52.8m in receivables that were due within 12 months. So its liabilities total ₹372.5m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of ₹390.5m, so it does suggest shareholders should keep an eye on MRO-TEK Realty's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MRO-TEK Realty'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 MRO-TEK Realty actually shrunk its revenue by 28%, to ₹261m. That makes us nervous, to say the least.
Caveat Emptor
Not only did MRO-TEK Realty's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹75m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹150m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting MRO-TEK Realty insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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