Is Mold-Tek (NSE:MOLDTKPAC) packaging a risky investment?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Mold-Tek Packaging Limited (NSE: MOLDTKPAC) uses debt in its business. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Mold-Tek Packaging

What is Mold-Tek Packaging’s debt?

You can click on the graph below for historical figures, but it shows that Mold-Tek Packaging had debt of ₹440.2m in March 2022, up from ₹1.08bn a year prior. However, he has ₹163.1 million in cash to offset this, resulting in a net debt of around ₹277.0 million.

NSEI:MOLDTKPAC Historical Debt to Equity August 9, 2022

A Look at Mold-Tek Packaging’s Responsibilities

We can see from the most recent balance sheet that Mold-Tek Packaging had liabilities of ₹728.5 million due within a year, and liabilities of ₹442.1 million due beyond. On the other hand, it had a cash position of ₹163.1 million and ₹1.48 billion in receivables due within a year. He can therefore boast of having ₹475.7 million more liquid assets than total Passives.

Considering the size of Mold-Tek Packaging, it looks like its cash is well balanced against its total liabilities. It is therefore highly unlikely that the ₹29.9bn company will run out of cash, but it is still worth keeping an eye on the balance sheet. But either way, Mold-Tek Packaging has virtually no net debt, so it’s fair to say that they don’t have a lot of debt!

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Mold-Tek Packaging has a low net debt to EBITDA ratio of just 0.23. And its EBIT covers its interest charges 10.1 times. So we’re pretty relaxed about his super-conservative use of debt. Also positive, Mold-Tek Packaging has increased its EBIT by 28% over the past year, which should facilitate debt repayment in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But future revenues, more than anything, will determine Mold-Tek Packaging’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Mold-Tek Packaging has had negative free cash flow, overall. Debt is generally more expensive and almost always riskier in the hands of a company with negative free cash flow. Shareholders should hope for an improvement.

Our point of view

The good news is that Mold-Tek Packaging’s demonstrated ability to increase EBIT thrills us like a fluffy puppy does a toddler. But the harsh truth is that we are concerned about its conversion from EBIT to free cash flow. When we consider the range of factors above, it appears that Mold-Tek Packaging is quite sensitive with its use of debt. While this carries some risk, it can also improve shareholder returns. 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 outside of the balance sheet. Example: we have identified 3 warning signs for Mold-Tek Packaging you should know, and one of them makes us a little uneasy.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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