These 4 measures indicate that Prakash Industries (NSE: PRAKASH) is using debt reasonably well
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Prakash Industries Limited (NSE: PRAKASH) is in debt. But does this debt worry shareholders?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free 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) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Prakash Industries
What is the debt of Prakash Industries?
The graph below, which you can click for more details, shows that Prakash Industries had 5.16 billion yen in debt as of September 2021; about the same as the year before. On the other hand, it has 718.9 million yen in cash, resulting in net debt of around 4.45 billion yen.
How strong is Prakash Industries’ balance sheet?
The latest balance sheet data shows that Prakash Industries had liabilities of 6.37 billion yen due within one year, and 4.83 billion yen liabilities due after that. On the other hand, he had cash of 718.9 million yen and receivables worth 1.79 billion yen within a year. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 8.69 billion euros.
This is a mountain of leverage compared to its market cap of 10.4 billion yen. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we consider debt versus earnings with and without amortization expenses.
Looking at its net debt on EBITDA of 1.2 and interest coverage of 3.8 times, it seems to us that Prakash Industries is probably using the debt in a fairly reasonable way. We therefore recommend that you keep a close eye on the impact of financing costs on the business. It is important to note that Prakash Industries has increased its EBIT by 63% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Prakash Industries will need revenue to repay this debt. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Prakash Industries has recorded free cash flow of 48% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
Our point of view
Based on our analysis, Prakash Industries’ EBIT growth rate should indicate that it will not have too many problems with its debt. However, our other observations were not so encouraging. For example, his total liability level makes us a little nervous about his debt. Looking at all this data, we feel a little cautious about the debt levels of Prakash Industries. While we understand that debt can improve returns on equity, we suggest shareholders watch their debt level closely, lest they increase. 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 off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Prakash Industries (of which 1 is significant!) that you should know.
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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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 documents. Simply Wall St has no position in the mentioned stocks.