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 risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies TIL Limited (NSE: TIL) uses debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for TIL
What is TIL’s net debt?
As you can see below, at the end of March 2021, TIL had 3.58 billion yen in debt, up from 2.89 billion yen a year ago. Click on the image for more details. However, given that it has a cash reserve of 448.1 million yen, its net debt is less, at around 3.13 billion yen.
A look at TIL’s responsibilities
According to the latest published balance sheet, TIL had liabilities of 3.83 billion yen due within 12 months and commitments of 1.26 billion yen due beyond 12 months. On the other hand, he had 448.1 million yen in cash and 2.38 billion yen in receivables due within one year. It therefore has liabilities totaling 2.26 billion yen more than its cash and short-term receivables combined.
Since this deficit is actually greater than the company’s market cap of 1.87 billion yen, we think shareholders should really watch TIL’s debt levels, like a parent watching their child go crazy. cycling for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely that shareholders would suffer a significant dilution.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
TIL’s debt is 2.7 times its EBITDA, and its EBIT covers its interest charges 3.0 times more. Overall, this implies that while we wouldn’t like to see debt levels rise, we believe it can handle its current leverage. However, it should be heartwarming for shareholders to remember that TIL has actually increased its EBIT by 10,036%, over the past 12 months. If he can continue on this path, he will be able to deleverage with relative ease. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of TIL that will influence the way the balance sheet is maintained in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, TIL has experienced substantial total negative free cash flow. While this may be the result of spending on growth, it makes debt much riskier.
Our point of view
Reflecting on TIL’s attempt to convert EBIT into free cash flow, we are certainly not enthusiastic. But on the positive side, its EBIT growth rate is a good sign and makes us more optimistic. Overall, we think it’s fair to say that TIL has enough debt that there is real risk around the balance sheet. If all goes well it may pay off, but the downside to this debt is a greater risk of permanent losses. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 4 warning signs for TIL you should be aware of this, and 2 of them should not be ignored.
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-flow-growing stocks today.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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