PSP Projects (NSE:PSPPROJECT) takes some risk with its use of debt

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. We note that Limited PSP projects (NSE:PSPPROJECT) has a debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. 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, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for PSP projects

What is PSP Projects net debt?

As you can see below, at the end of September 2020, PSP Projects had ₹1.18 billion in debt, up from ₹752.9 million a year ago. Click on the image for more details. But on the other hand, it also has ₹2.92 billion in cash, resulting in a net cash position of ₹1.75 billion.

NSEI:PSPPROJECT Historical Debt to Equity March 12, 2021

A look at the liabilities of PSP projects

Zooming in on the latest balance sheet data, we can see that PSP Projects had liabilities of ₹4.18 billion due within 12 months and liabilities of ₹39.9 million due beyond. On the other hand, it had cash of ₹2.92 billion and ₹2.10 billion in receivables due within a year. Thus, he can boast of having ₹810.6 million more liquid assets than total Passives.

This surplus suggests that PSP Projects has a conservative balance sheet and could probably eliminate its debt without too much difficulty. Simply put, the fact that PSP Projects has more cash than debt is arguably a good indication that it can safely manage its debt.

Fortunately, the burden of PSP Projects is not too heavy, because its EBIT fell by 41% over last year. When a company sees its profit reservoir, it can sometimes find its relationship with its lenders soured. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether PSP Projects can strengthen its balance sheet over time. So if you want to see what the pros think, you might find this free analyst earnings forecast report Be interesting.

Finally, while the taxman may love accounting profits, lenders only accept cash. Although PSP Projects has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building ( or erodes) this treasury. balance. Over the past three years, PSP Projects has burned a lot of money. While investors no doubt expect a reversal of this situation in due course, it clearly means that its use of debt is more risky.


While we sympathize with investors who find debt a concern, you should bear in mind that PSP Projects has a net cash position of ₹1.75 billion, as well as more liquid assets than liabilities. So while we see areas for improvement, we’re not too worried about PSP Projects’ track record. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 2 warning signs we spotted with PSP Projects .

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

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