Does Atul Auto (NSE: ATULAUTO) use debt wisely?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the fact that you suffer a 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 note that Atul Auto Limited (NSE: ATULAUTO) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest review for Atul Auto
What is Atul Auto’s debt?
As you can see below, at the end of March 2021, Atul Auto was in debt of 156.9 million yen, up from 7.40 million yen a year ago. Click on the image for more details. However, his balance sheet shows that he holds 195.8 million yen in cash, so he actually has net cash of 38.9 million yen.
A look at the responsibilities of Atul Auto
Zooming in on the latest balance sheet data, we can see that Atul Auto had a liability of 716.5 million yen owed within 12 months and a liability of 160.6 million yen beyond. In compensation for these obligations, it had cash of 195.8 million as well as receivables valued at 252.4 million over 12 months. Thus, its liabilities exceed by 428.9 M the sum of its cash and its receivables (short term).
Considering that the listed Atul Auto shares are worth a total of 4.81 billion yen, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite its notable liabilities, Atul Auto has a net cash flow, so it is fair to say that it does not have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But it is Atul Auto’s results that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
In the past year, Atul Auto recorded a loss before interest and taxes and actually reduced its revenue by 41%, to 3.0 billion yen. To be frank, that doesn’t bode well.
So how risky is Atul Auto?
While Atul Auto lost money in earnings before interest and taxes (EBIT), it actually generated positive free cash flow of 7.8 million euros. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. With uninspiring revenue growth, we would really need to see positive EBIT before we can gather much enthusiasm for this business. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for Atul Auto (1 should not be ignored) you should be aware of this.
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.
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 does not have any position in the mentioned stocks.
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