These 4 metrics indicate that TCPL Packaging (NSE: TCPLPACK) is using debt a lot
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 synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We notice that TCPL Packaging Limited (NSE: TCPLPACK) has debt on its balance sheet. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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, 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 step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for TCPL Packaging
What is TCPL Packaging’s debt?
You can click on the graph below for historical figures, but it shows that in September 2021, TCPL Packaging had debt of ₹3.88 billion, an increase from ₹3.58 billion, on a year. However, since he has a cash reserve of ₹182.2 million, his net debt is lower at around ₹3.69 billion.
How healthy is TCPL Packaging’s balance sheet?
According to the latest published balance sheet, TCPL Packaging had liabilities of ₹3.90 billion due within 12 months and liabilities of ₹2.09 billion due beyond 12 months. In return, he had ₹182.2 million in cash and ₹1.78 billion in receivables due within 12 months. It therefore has liabilities totaling ₹4.03 billion more than its cash and short-term receivables, combined.
This is a mountain of leverage compared to its market capitalization of ₹5.66 billion. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.
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 ).
TCPL Packaging’s debt is 2.8 times its EBITDA, and its EBIT covers its interest expense 2.9 times. Taken together, this implies that, while we wouldn’t like to see debt levels increase, we think he can manage his current leverage. On a slightly more positive note, TCPL Packaging increased its EBIT by 14% over last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when analyzing debt. But it’s TCPL Packaging’s earnings that will influence the balance sheet going forward. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, TCPL Packaging has recorded free cash flow of 26% of EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Our point of view
TCPL Packaging’s interest coverage was a real negative in this analysis, although the other factors we considered cast it in a significantly better light. But on the bright side, its ability to increase EBIT isn’t too shabby at all. Considering all the factors discussed, it seems to us that TCPL Packaging is taking risks with its use of debt. While this debt may increase returns, we believe the company now has sufficient leverage. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that TCPL Packaging displays 3 warning signs in our investment analysis and 1 of them is a little unpleasant…
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.