These 4 measurements indicate that Bhagyanagar Properties (NSE: BHAGYAPROP) is using debt intensively

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Above all, Bhagyanagar Properties Limited (NSE: BHAGYAPROP) is in debt. But should shareholders be concerned about its use of debt?

When is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels, together.

Check out our latest review for Bhagyanagar properties

What is the net debt of Bhagyanagar Properties?

The image below, which you can click for more details, shows that in September 2021, Bhagyanagar Properties had a debt of 228.3 million yen, up from 210.7 million yen in a year. Net debt is about the same because it doesn’t have a lot of cash.

NSEI: BHAGYAPROP History of debt on equity December 2, 2021

A look at the responsibilities of Bhagyanagar properties

Zooming in on the latest balance sheet data, we can see that Bhagyanagar Properties had a liability of 120.4 million yen owed within 12 months and a liability of 239.2 million yen owed beyond that. On the other hand, it had cash of 1.34 million and 37.8 million in receivables within one year. Its liabilities are therefore ₹ 320.4m more than the combination of its cash and short-term receivables.

While this may sound like a lot, it isn’t that big of a deal since Bhagyanagar Properties has a market capitalization of 1.16 billion yen, and therefore could likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay your debt.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.

With a net debt to EBITDA ratio of 11.8, it’s fair to say that Bhagyanagar Properties has significant debt. However, its interest coverage of 2.8 is reasonably strong, which is a good sign. Worse yet, Bhagyanagar Properties’ EBIT fell 57% from last year. If the income continues like this for the long haul, there is an incredible chance to pay off that debt. 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 Bhagyanagar Properties 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.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Bhagyanagar Properties has spent a lot of money. While investors no doubt expect this situation to reverse in due course, this clearly means that its use of debt is riskier.

Our point of view

To be frank, Bhagyanagar Properties’ EBIT conversion to free cash flow and its history of (not) growing its EBIT makes us rather uncomfortable with its debt levels. But at least his total liability level isn’t that bad. Overall, it seems to us that Bhagyanagar Properties’ balance sheet is really very risky for the company. We are therefore almost as wary of this stock as a hungry kitten falls into its owner’s fish pond: once bitten, twice shy, as they say. When analyzing debt levels, the balance sheet is the obvious place to start. 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 4 warning signs for the properties of Bhagyanagar (1 of which should not be ignored!) that you should 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-growing stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock 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 material. Simply Wall St has no position in any of the stocks mentioned.


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John A. Bogar