Would Aditya Birla Fashion and Retail (NSE: ABFRL) fare better with less debt?


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. Mostly, Aditya Birla Fashion and Retail Limited (NSE: ABFRL) is in debt. But the most important question is: what risk does this debt create?

When is debt dangerous?

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. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both cash and debt levels.

Check out our latest analysis for Aditya Birla Fashion and Retail

How much debt does Aditya Birla Fashion and Retail carry?

As you can see below, Aditya Birla Fashion and Retail had 11.4 billion yen in debt in March 2021, up from 27.8 billion yen the previous year. On the other hand, he has 8.17 billion yen in cash, resulting in net debt of around 3.19 billion yen.

NSEI: ABFRL History of debt to equity July 13, 2021

How strong is Aditya Birla Fashion and Retail’s balance sheet?

According to the latest published balance sheet, Aditya Birla Fashion and Retail had liabilities of 42.2 billion yen due within 12 months and liabilities of 32.7 billion yen due beyond 12 months. In return, he had 8.17 billion yen in cash and 7.37 billion yen in receivables due within 12 months. It therefore has liabilities totaling 59.4 billion yen more than its cash and short-term receivables combined.

While that might sound like a lot, it’s not that bad since Aditya Birla Fashion and Retail has a market cap of 199.8 billion yen, and therefore could likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Aditya Birla Fashion and Retail 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.

In the past year, Aditya Birla Fashion and Retail recorded a loss before interest and taxes and in fact reduced its revenue by 40%, to 52 billion yen. To be frank, that doesn’t bode well.

Emptor Warning

While Aditya Birla Fashion and Retail’s decline in earnings is about as heartwarming as a wet hedge, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Indeed, it lost 7.5 billion euros at the EBIT level. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. For example, we wouldn’t want to see a repeat of last year’s ₹ 6.7b loss. So we think this title is quite risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Aditya Birla Fashion and Retail (of which 1 is a bit unpleasant!) to know.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.

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