Prajay Engineers Syndicate (NSE: PRAENG) Debt use could be seen as risky
Howard Marks put 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 every investor practice that I know is worried “. 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 can see that Prajay Limited Engineers Union (NSE: PRAENG) uses debt in his business. But the most important question is: what risk does this debt create?
When is debt dangerous?
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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. 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 thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Prajay Engineers Syndicate
What is the net debt of the Prajay Engineers Syndicate?
You can click on the chart below for historical figures, but it shows Prajay Engineers Syndicate had 1.64 billion yen in debt in March 2021, up from 1.95 billion yen a year earlier. Net debt is about the same because it doesn’t have a lot of cash.
How strong is the Prajay Engineers Syndicate balance sheet?
We can see from the most recent balance sheet that the Prajay Engineers Syndicate had liabilities of 4.86 billion yen due within one year and liabilities of 1.62 billion yen beyond. In compensation for these obligations, it had cash of 31.8 million as well as receivables valued at 1.93 million due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by â¹ 4.51b.
The lack here weighs heavily on the â¹ 1.25b company itself, as if a child struggles under the weight of a huge backpack full of books, his gym gear, and a trumpet. So we would be watching its record closely, without a doubt. After all, Prajay Engineers Syndicate would likely need a major recapitalization if it were to pay its creditors today.
We measure a company’s debt load relative to its earning capacity 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 costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Low interest coverage of 0.29 times and an extremely high Net Debt to EBITDA ratio of 28.2 hit our confidence in Prajay Engineers Syndicate like a punch in the stomach. The debt burden here is considerable. However, the bright side is that Prajay Engineers Syndicate achieved a positive EBIT of 17 million yen over the past twelve months, an improvement over the loss of the previous year. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the revenues of the Prajay Engineers Syndicate 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.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) are converted into actual free cash flow. In the most recent year, Prajay Engineers Syndicate recorded free cash flow of 34% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Our point of view
At first glance, the Prajay Engineers Syndicate’s interest coverage left us hesitant about the stock, and its total liability level was no more appealing than the only empty restaurant on the busiest night of the year. That said, his ability to increase his EBIT is not that much of a concern. After reviewing the data points discussed, we believe Prajay Engineers Syndicate has too much debt. This kind of risk is acceptable to some, but it certainly does not float our boat. 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. For example, we discovered 2 warning signs for Prajay Engineers Syndicate which you should know before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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