Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Optiemus Infracom Limited (NSE:OPTIEMUS) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Optiemus Infracom Carry?
As you can see below, Optiemus Infracom had ₹2.49b of debt at March 2019, down from ₹3.97b a year prior. On the flip side, it has ₹335.5m in cash leading to net debt of about ₹2.15b.
How Strong Is Optiemus Infracom's Balance Sheet?
According to the last reported balance sheet, Optiemus Infracom had liabilities of ₹3.33b due within 12 months, and liabilities of ₹2.01b due beyond 12 months. Offsetting this, it had ₹335.5m in cash and ₹4.34b in receivables that were due within 12 months. So it has liabilities totalling ₹662.0m more than its cash and near-term receivables, combined.
Of course, Optiemus Infracom has a market capitalization of ₹4.31b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Optiemus Infracom will need earnings to service that debt. 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 Optiemus Infracom managed to grow its revenue by 23%, to ₹10b. With any luck the company will be able to grow its way to profitability.
While we can certainly savour Optiemus Infracom's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost a very considerable ₹718m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of-₹411.9m. So in short it's a really risky stock. 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 Optiemus Infracom's profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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