Here’s why Kridhan Infra (NSE: KRIDHANINF) can get into debt

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.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Kridhan Infra Limited (NSE: KRIDHANINF) is in debt. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free 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) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels, together.

Check out our latest analysis for Kridhan Infra

What is the debt of Kridhan Infra?

As you can see below, Kridhan Infra had 195.5 million yen in debt, as of September 2021, which is roughly the same as the year before. You can click on the graph for more details. However, it has 4.60 million yen in cash offsetting this, which leads to net debt of around 190.9 million yen.

NSEI: KRIDHANINF History of debt to equity December 2, 2021

How healthy is Kridhan Infra’s balance sheet?

According to the latest published balance sheet, Kridhan Infra had liabilities of 562.9 million yen due within 12 months and liabilities of 24.6 million yen due beyond 12 months. On the other hand, it had cash of 4.60 million and 486.3 million in receivables due within one year. His liabilities are therefore ₹ 96.6m more than the combination of his cash and short-term receivables.

Of course, Kridhan Infra has a market cap of 537.4 million yen, so these liabilities are likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Kridhan Infra that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over 12 months, Kridhan Infra reported revenue of 284 million yen, a gain of 169%, although it reported no profit before interest and taxes. Its fairly obvious shareholders are therefore hoping for more growth!

Emptor Warning

Even though Kridhan Infra has managed to grow his turnover quite adroitly, the hard truth is that he is losing money on the EBIT line. To be precise, the EBIT loss amounted to 14 million yen. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. Another reason for caution is that it has lost 16 million negative free cash flow over the last twelve months. Suffice it to say that we consider the action to be risky. 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. For example, Kridhan Infra has 5 warning signs (and 3 that make us uncomfortable) we think you should know about.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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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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