Bartronics India (NSE: BARTRONICS) Debt use could be seen as risky

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Bartronics India Limited (NSE: BARTRONICS) uses debt in its business. But the real question is whether this debt makes the business risky.

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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. 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, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Bartronics India

How much debt does Bartronics India have?

You can click on the graph below for historical figures, but it shows that in March 2022, Bartronics India had a debt of ₹12.0 billion, an increase from ₹10.9 billion, on a year. And he doesn’t have a lot of cash, so his net debt is about the same.

NSEI: BARTRONICS Debt to Equity History August 2, 2022

How strong is Bartronics India’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Bartronics India had liabilities of ₹15.5bn due within 12 months and liabilities of ₹82.0k due beyond. As compensation for these obligations, it had cash of ₹153.3 million as well as receivables valued at ₹10.9 billion due within 12 months. It therefore has liabilities totaling ₹4.52 billion more than its cash and short-term receivables, combined.

The deficiency here weighs heavily on the ₹199.5 million business 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. After all, Bartronics India would likely need a major recapitalization if it were to pay its creditors today.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Bartronics India shareholders face the double whammy of a high net debt to EBITDA ratio (211) and quite low interest coverage, as EBIT is only 0.026 times interest expense. The debt burden here is considerable. Another concern for investors could be that Bartronics India’s EBIT fell 18% last year. If things continue like this, dealing with debt will be about as easy as putting an angry house cat in its travel box. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Bartronics India will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Fortunately for all shareholders, Bartronics India has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

To be frank, Bartronics India’s interest coverage and track record of keeping its total liabilities under control makes us rather uncomfortable with its level of leverage. But at least it’s decent enough to convert EBIT to free cash flow; it’s encouraging. We are quite clear that we consider Bartronics India to be rather risky, given the health of its balance sheet. For this reason, we are quite cautious about the stock and believe shareholders should keep a close eye on its liquidity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Bartronics India you should know.

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.

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