We believe that Trejhara Solutions (NSE: TREJHARA) is taking risks with its 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 I worry about … and every investor practice that I know is worried. It’s only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies Trejhara Solutions Limited (NSE: TREJHARA) uses the debt. But should shareholders be concerned about its use of debt?

When is debt dangerous?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest review for Trejhara Solutions

What is the debt of Trejhara Solutions?

As you can see below, at the end of September 2021, Trejhara Solutions had 272.4 million yen in debt, up from 128.4 million yen a year ago. Click on the image for more details. Net debt is about the same because it doesn’t have a lot of cash.

History of debt on equity of NSEI: TREJHARA November 26, 2021

A look at the responsibilities of Trejhara Solutions

Zooming in on the latest balance sheet data, we can see that Trejhara Solutions had a liability of 982.5 million yen due within 12 months and a liability of 236.0 million yen beyond. On the other hand, it had cash of 5.07 M and 205.0 M of receivables due within one year. It therefore has liabilities totaling 1.01 billion yen more than its combined cash and short-term receivables.

Since this deficit is actually greater than the company’s market cap of 804.7 million yen, we think shareholders should really watch Trejhara Solutions’ debt levels, like a parent watching their child do. cycling for the first time. Hypothetically, extremely high dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

We would say that Trejhara Solutions’ moderate net debt to EBITDA ratio (being 1.8) indicates cautious leverage. And its imposing EBIT of 30.8 times its interest costs, means the debt load is as light as a peacock feather. It is important to note that Trejhara Solutions has increased its EBIT by 58% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Trejhara Solutions will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Trejhara Solutions has posted free cash flow of 18% of its EBIT, which is really pretty low. For us, the conversion to cash that elicits a bit of paranoia is the ability to extinguish debt.

Our point of view

We feel some apprehension about the difficulty level of Trejhara Solutions’ total liabilities, but we also have some positives to focus on. Its interest coverage and EBIT growth rate are encouraging signs. We think Trejhara Solutions’ debt makes it a bit risky, after considering the aforementioned data points together. This isn’t necessarily a bad thing, as leverage can increase returns on equity, but it’s something to be aware of. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. We have identified 1 warning sign with Trejhara Solutions, and understanding them should be part of your investment process.

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.

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 shares 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.

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