Does Amber Enterprises India (NSE:AMBER) Have A Healthy Balance Sheet?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Amber Enterprises India Limited (NSE:AMBER) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Amber Enterprises India
What Is Amber Enterprises India’s Debt?
The image below, which you can click on for greater detail, shows that Amber Enterprises India had debt of ₹3.49b at the end of March 2021, a reduction from ₹3.67b over a year. However, it does have ₹3.51b in cash offsetting this, leading to net cash of ₹15.8m.
How Strong Is Amber Enterprises India’s Balance Sheet?
We can see from the most recent balance sheet that Amber Enterprises India had liabilities of ₹16.8b falling due within a year, and liabilities of ₹2.70b due beyond that. On the other hand, it had cash of ₹3.51b and ₹10.9b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹5.04b.
Since publicly traded Amber Enterprises India shares are worth a total of ₹93.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Amber Enterprises India boasts net cash, so it’s fair to say it does not have a heavy debt load!
Shareholders should be aware that Amber Enterprises India’s EBIT was down 47% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Amber Enterprises India can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. While Amber Enterprises India has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Amber Enterprises India recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
While it is always sensible to look at a company’s total liabilities, it is very reassuring that Amber Enterprises India has ₹15.8m in net cash. So while Amber Enterprises India does not have a great balance sheet, it’s certainly not too bad. 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. We’ve identified 3 warning signs with Amber Enterprises India , and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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