While we wouldn't worry about MIRC Electronics's net debt to EBITDA ratio of 3.9, we think its super-low interest cover of 0.89 times is a sign of high leverage.
This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it. In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). When we examine debt levels, we first consider both cash and debt levels, together. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. But is this debt a concern to shareholders? Why Does Debt Bring Risk?ĭebt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. As with many other companies MIRC Electronics Limited ( NSE:MIRCELECTR) makes use of debt. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.
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