Marine Electricals (India) (NSE: MARINE) has a somewhat strained balance sheet
David Iben put it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Marine Electricals (India) Limited (NSE: MARINE) uses debt in its business. But the most important question is: what risk does this debt create?
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own 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 costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both cash and debt levels.
See our latest review for Marine Electricals (India)
What is the debt of Marine Electricals (India)?
As you can see below, Marine Electricals (India) had a debt of 488.8 million yen, as of March 2021, which is roughly the same as the previous year. You can click on the graph for more details. On the other hand, it has 139.0 million in cash, resulting in a net debt of around 349.8 million.
How strong is the balance sheet of Marine Electricals (India)?
According to the latest published balance sheet, Marine Electricals (India) had liabilities of 2.01 billion yen due within 12 months and liabilities of 122.3 million yen due beyond 12 months. In return, he had 139.0 million in cash and 2.30 billion in receivables due within 12 months. He can therefore claim 305.3 million yen more in liquid assets than total Liabilities.
This short-term liquidity is a sign that Marine Electricals (India) could probably pay off its debt easily, as its balance sheet is far from tight.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Given that the net debt is only 1.3 times the EBITDA, it is first surprising to see that the EBIT of Marine Electricals (India) has low interest coverage of 2.0 times. So one way or another, it’s clear that debt levels are not trivial. It is important to note that the EBIT of Marine Electricals (India) has remained essentially stable over the last twelve months. Ideally, he can reduce his debt by starting profit growth. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Marine Electricals (India) will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Marine Electricals (India) has experienced substantial total negative free cash flow. While investors no doubt expect this situation to turn around in due course, this clearly means that its use of debt is riskier.
Our point of view
The conversion of Marine Electrical (India) EBIT to free cash flow and its interest coverage was disheartening. But it’s not that bad to stay on top of your total liabilities. We think Marine Electricals (India) debt makes it a bit risky, having looked at the aforementioned data points together. This isn’t necessarily a bad thing, as leverage can increase returns on equity, but it’s something to be aware of. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 1 warning sign for Marine Electricals (India) of which you should be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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