Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies Marvel Decor Limited (NSE: MDL) uses debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing 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 of a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for Marvel Decor

How much debt does Marvel Decor carry?

The image below, which you can click for more details, shows that Marvel Decor was in debt of 120.3 million yen at the end of September 2021, a reduction from the 126.6 million yen on a year. On the other hand, it has 36.4 million euros in cash, resulting in net debt of around 83.9 million euros.

How strong is Marvel Decor’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Marvel Decor had a liability of 178.4 million yen owed within 12 months and a liability of 35.1 million yen owed beyond that. In compensation for these obligations, it had cash of 36.4 million as well as receivables valued at 45.0 million at 12 months. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by ₹ 132.1m.

Marvel Decor has a market cap of 506.1 million yen, so it could most likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.

Looking at its net debt on EBITDA of 1.4 and interest coverage of 3.0 times, it seems to us that Marvel Decor is probably using the debt in a fairly reasonable way. But the interest payments are certainly enough to make us think about how affordable his debt is. We also note that Marvel Decor improved its EBIT from a loss last year to a positive of 40 million euros. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Marvel Decor will need revenue to pay off this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent profit before interest and taxes (EBIT) is supported by free cash flow. As of the most recent year, Marvel Decor recorded free cash flow of 46% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.

Our point of view

From what we’ve seen, Marvel Decor doesn’t find it easy, given its coverage of interest, but the other factors we’ve taken into account give us cause for optimism. There is no doubt that it has adequate capacity to manage its debt, based on its EBITDA. When we consider all of the factors mentioned above, we feel a little cautious about Marvel Decor’s use of debt. While debt has its advantage in potential higher returns, we believe shareholders should definitely consider how leverage levels might make the stock riskier. 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 off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 Warning Signs for Marvel Decor you should know.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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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 documents. Simply Wall St has no position in any of the stocks mentioned.