Sanginita Chemicals (NSE: SANGINITA) has a somewhat strained record


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. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Sanginita Chemicals Limited (NSE: SANGINITA) uses debt. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. 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 Sanginita Chemicals

What is the debt of Sanginita Chemicals?

As you can see below, Sanginita Chemicals had a debt of 289.5 million yen in March 2021, up from 349.4 million yen the year before. And he doesn’t have a lot of cash, so his net debt is about the same.

NSEI: SANGINITA History of debt on equity 23 July 2021

How healthy is Sanginita Chemicals’ track record?

The latest balance sheet data shows Sanginita Chemicals had 305.4 million yen in debt due within one year, and 2.08 million yen in debt due thereafter. In return, he had 84.0 K in cash and 291.9 M in receivables due within 12 months. Its liabilities are therefore 15.5 million more than the combination of its cash and short-term receivables.

Of course, Sanginita Chemicals has a market cap of 548.2 million yen, so this liability is probably manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

Sanginita Chemicals shareholders face the double whammy of a high net debt / EBITDA ratio (5.5) and fairly low interest coverage, since EBIT is only 2.0 times expenses of interest. This means that we would consider him to be in heavy debt. Worse yet, Sanginita Chemicals’ EBIT was down 26% from last year. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Sanginita Chemicals will need revenue to repay this debt. So, if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Sanginita Chemicals free cash flow has been 37% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.

Our point of view

To be frank, Sanginita Chemicals’ net debt to EBITDA and its history of (not) growing its EBIT makes us rather uncomfortable with its debt levels. But on the bright side, his total liability level is a good sign and makes us more optimistic. Once we consider all of the above factors together, it seems to us that Sanginita Chemicals’ debt makes it a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. 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. To this end, you should inquire about the 5 warning signs we spotted with Sanginita Chemicals (including 3 that are potentially serious).

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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This Simply Wall St article is general in nature. 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.
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