These 4 measures show that Kopran (NSE: KOPRAN) uses debt safely


Some say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that “volatility is nowhere near synonymous with risk.” So it might be obvious that you need to consider debt when thinking about how risky a particular stock is, as too much debt can bring a company down. As with many other companies Kopran Limited (NSE: KOPRAN) takes advantage of debt. The real question, however, is whether these debts make the company risky.

When is debt dangerous?

Debt and other liabilities become risky for a company when it cannot meet those obligations easily, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company fails to meet its legal debt settlement obligations, shareholders could get away with nothing. However, a more common (but still costly) occurrence is when a company has to issue stocks at bargain prices, which permanently dilutes shareholders just to prop up its balance sheet. Of course, debt can be an important tool in any business, especially in capital-intensive companies. The first step in looking at a company’s debt level is to look at its cash and debt together.

Check out our latest analysis for copran

What is Kopran’s Net Debt?

The image below, which you can click for more details, shows that Kopran had debts of 629.2 million at the end of September 2020, but it also had 47.4 million in cash so its net debt is 581.8 million.

NSEI: KOPRAN Debt-to-Equity History March 22, 2021

A look at Kopran’s liabilities

The latest balance sheet data shows that Kopran had liabilities of 1.40 billion within one year and liabilities of 327.9 million maturing thereafter. On the other hand, it had cash and cash equivalents of 47.4 million and receivables of 1.10 billion due within one year. This brings his debt to ₹ 583.5 million more than the combination of cash and short-term receivables.

With publicly traded copran stock valued at 4.53 billion yen, it seems unlikely that this level of debt would pose a major threat. Nonetheless, it is clear that we should continue to monitor his record so that it does not deteriorate.

We measure a company’s debt burden in relation to its profitability by looking at net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily earnings before interest and taxes (EBIT) cover its interest costs (Interest coverage). The advantage of this approach is that we take into account both the absolute level of debt (with net debt to EBITDA) and the actual interest expenses associated with this debt (with its interest coverage ratio).

Kopran has a low net debt to EBITDA ratio of just 0.73. And the EBIT easily covers 14.4 times the interest expense. So one could argue that it is no more threatened from its debts than an elephant is from a mouse. Even more impressive was the fact that Kopran increased its EBIT by 112% in twelve months. If this growth is sustained, debt will become even more manageable in the years to come. The balance sheet is clearly the area to focus on when analyzing debt. But you cannot look at debt in complete isolation; because copran needs income to service this debt. So if you want to know more about earnings, it might be worth taking a look this graph of the long-term earnings trend.

After all, a business needs free cash flow to pay off debts; Accounting profits just don’t cut it off. So we have to see clearly whether this EBIT leads to a corresponding free cash flow. For the past three years, Kopran has had free cash flow of 66% of its EBIT, which is pretty normal as the free cash flow is excluding interest and taxes. That cold money means it can get out of debt if it wants to.

Our view

Kopran’s interest coverage suggests it can manage its debt as easily as Cristiano Ronaldo could score against a goalkeeper under 14. And that’s just the beginning of the good news, because the EBIT growth rate is also very encouraging. Given these number of factors, Kopran appears to be quite cautious with its debt and the risks appear to be well managed. So we don’t worry about using a small leverage on the balance sheet. Undoubtedly, we learn most about balance sheet debt. However, not all of the investment risk is on the balance sheet – on the contrary. We have identified 3 warning signs with copran , and understanding them should be part of your investment process.

After all that, if you’re more interested in a fast-growing company with a rock-solid balance sheet, stop by our list of net cash growth stocks without delay.

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