Here’s why Kothari (NSE: KOTHARIPRO) products can afford to go into debt
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk that worries me … and every investor practices that I know is worried “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, Kothari Products Limited (NSE: KOTHARIPRO) is in debt. But should shareholders be worried about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. 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 Kothari products
What is the net debt of Kothari Products?
You can click on the chart below for historical figures, but it shows that Kothari Products had 10.3 billion yen in debt in March 2021, up from 11.0 billion yen a year earlier. However, he also had 1.14 billion yen in cash, so his net debt is 9.11 billion yen.
How strong is Kothari Products’ balance sheet?
The latest balance sheet data shows that Kothari Products had liabilities of 10.8 billion yen due within one year, and liabilities of 4.10 billion yen due after that. On the other hand, he had a cash position of 1.14 billion yen and 20.5 billion yen in receivables within a year. It can therefore rely on 6.75 billion more liquid assets than total Liabilities.
This excess liquidity suggests that Kothari Products’ balance sheet could take a hit just as Homer Simpson’s head could take a hit. With this in mind, one could postulate that its track record means that the company is able to cope with some adversity. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the earnings of Kothari Products that will influence the balance sheet in the future. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Over the past year, Kothari Products recorded a loss before interest and taxes and actually reduced its revenue by 24%, to 31 billion yen. It makes us nervous, to say the least.
Not only has Kothari Products’ revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Indeed, it lost a very considerable amount of 738 million euros at the EBIT level. Having said that, we are impressed by the strong liquidity of the balance sheet. This should give the company time to increase its cash flow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the business to start a recovery. 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 4 warning signs we have spotted some Kothari products (including 2 that should not be overlooked).
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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