Legfinishary fund manager Li Lu (who Charlie Munger backed) once declared, ‘The largegest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it might be obvious that you required to consider debt, when you consider about how risky any given stock is, becaapply too much debt can sink a company. We note that Bannari Amman Spinning Mills Ltd (NSE:BASML) does have debt on its balance sheet. But should shareholders be worried about its apply of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to receive debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business applys is to see at its cash and debt toreceiveher.
How Much Debt Does Bannari Amman Spinning Mills Carry?
As you can see below, Bannari Amman Spinning Mills had ₹4.48b of debt, at September 2025, which is about the same as the year before. You can click the chart for greater detail. Net debt is about the same, since the it doesn’t have much cash.
How Healthy Is Bannari Amman Spinning Mills’ Balance Sheet?
According to the last reported balance sheet, Bannari Amman Spinning Mills had liabilities of ₹4.09b due within 12 months, and liabilities of ₹1.33b due beyond 12 months. Offsetting this, it had ₹57.7m in cash and ₹1.74b in receivables that were due within 12 months. So its liabilities total ₹3.62b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the ₹1.71b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely consider shareholders required to watch this one closely. After all, Bannari Amman Spinning Mills would likely require a major re-capitalisation if it had to pay its creditors today.
See our latest analysis for Bannari Amman Spinning Mills
In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Weak interest cover of 1.6 times and a disturbingly high net debt to EBITDA ratio of 5.1 hit our confidence in Bannari Amman Spinning Mills like a one-two punch to the gut. The debt burden here is substantial. However, it should be some comfort for shareholders to recall that Bannari Amman Spinning Mills actually grew its EBIT by a hefty 701%, over the last 12 months. If that earnings trfinish continues it will create its debt load much more manageable in the future. The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since Bannari Amman Spinning Mills will required earnings to service that debt. So when considering debt, it’s definitely worth seeing at the earnings trfinish. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly required to see at whether that EBIT is leading to corresponding free cash flow. During the last three years, Bannari Amman Spinning Mills generated free cash flow amounting to a very robust 94% of its EBIT, more than we’d expect. That positions it well to pay down debt if desirable to do so.
Our View
While Bannari Amman Spinning Mills’s level of total liabilities has us nervous. To wit both its conversion of EBIT to free cash flow and EBIT growth rate were encouraging signs. When we consider all the factors discussed, it seems to us that Bannari Amman Spinning Mills is taking some risks with its apply of debt. So while that leverage does boost returns on equity, we wouldn’t really want to see it increase from here. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For example Bannari Amman Spinning Mills has 4 warning signs (and 1 which is significant) we consider you should know about.
At the finish of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
Valuation is complex, but we’re here to simplify it.
Discover if Bannari Amman Spinning Mills might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividfinishs, insider trades, and its financial condition.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only utilizing an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to acquire or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focapplyd analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Leave a Reply