Sundram Fasteners (NSE: SUNDRMFAST) has a rock-solid balance sheet

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Sundram Fasteners Limited (NSE:SUNDRMFAST) has debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Sundram Fasteners

How much debt does Sundram Fasteners have?

The image below, which you can click on for more details, shows that as of March 2022, Sundram Fasteners had a debt of ₹7.54 billion, up from ₹6.84 billion in one year. However, he has ₹565.7 million in cash to offset this, resulting in a net debt of around ₹6.97 billion.

NSEI:SUNDRMFAST Debt to Equity History July 3, 2022

How healthy is Sundram Fasteners’ balance sheet?

The latest balance sheet data shows that Sundram Fasteners had liabilities of ₹12.5 billion due within a year, and liabilities of ₹3.97 billion falling due thereafter. As compensation for these obligations, it had cash of ₹565.7 million as well as receivables valued at ₹10.5 billion due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by ₹5.42 billion.

Considering that Sundram Fasteners has a market capitalization of ₹155.9 billion, it is hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Sundram Fasteners has a low net debt to EBITDA ratio of just 0.88. And its EBIT covers its interest charges 23.8 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Also positive, Sundram Fasteners has increased its EBIT by 26% over the past year, which should make it easier to pay down debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Sundram Fasteners’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Sundram Fasteners has recorded free cash flow of 56% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

The good news is that Sundram Fasteners’ demonstrated ability to cover its interest charges with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, since its EBIT growth rate also confirms this impression! Zooming out, Sundram Fasteners appears to be using debt quite sensibly; and that gets the green light from us. Although debt carries risks, when used wisely, it can also generate a higher return on equity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example – Sundram Fasteners has 1 warning sign we think you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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