These 4 metrics indicate that Container Corporation of India (NSE:CONCOR) is using debt safely
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Container Corporation of India Limited (NSE:CONCOR) uses debt. But the more important question is: what risk does this debt create?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Container Corporation of India
How much debt does Container Corporation of India have?
You can click on the graph below for historical figures, but it shows that as of March 2022, Container Corporation of India had ₹7.35 billion in debt, an increase from ₹6.48 billion, on a year. But he also has ₹29.2 billion in cash to offset this, meaning he has a net cash of ₹21.8 billion.
How strong is Container Corporation of India’s balance sheet?
According to the latest published balance sheet, Container Corporation of India had liabilities of ₹14.2 billion due within 12 months and liabilities of ₹7.22 billion due beyond 12 months. On the other hand, it had a cash position of ₹29.2 billion and ₹2.64 billion in receivables due within a year. It can therefore boast of having ₹10.4 billion more liquid assets than total Passives.
This short-term liquidity is a sign that Container Corporation of India could probably repay its debt easily, as its balance sheet is far from stretched. Simply put, the fact that Container Corporation of India has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, we are happy to report that Container Corporation of India has increased its EBIT by 60%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Container Corporation of India’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Container Corporation of India has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it builds (or erodes) this cash balance. Over the past three years, Container Corporation of India has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it is always a good idea to investigate a company’s debt, in this case Container Corporation of India has ₹21.8 billion in net cash and a decent balance sheet. The icing on the cake was that he converted 110% of that EBIT into free cash flow, bringing in ₹5.8 billion. We therefore do not believe that Container Corporation of India’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 1 warning sign for Container Corporation of India of which you should be aware.
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.
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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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