Top high debt companies in India

Debt, in the words of Warren Buffet, "is like driving a car with a dagger on the steering wheel pointed at your heart. [..] There will be fewer accidents, but when they happen, they will be fatal."

No doubt, Debt is a crucial factor as it fuels the company's ambitions and helps them to grow and develop. But as we know, too much of something is good for nothing. Hence, whenever the debt levels are fearfully high, as an investor, you will be on a more risky patch.

But does a high debt mean the company's going to fail? Need not be a 'yes' always. Companies like Reliance have had a high debt, but their growth made the inherited risk negligible. However, the same cannot be said of others, for instance, Ruchi Soya. So, being cautious while not over-weighing is crucial.

Having said that, in order to be cautious, you need to know which companies hold high debts. But how do you identify companies with high debt levels, you ask?

Without further ado, let's jump in to find the answer.

How to locate high-debt companies?

Hurray! We have made the list for you:

The above list is based on parameters like Debt to Equity ratio of more than 1 and Market Capitalisation of over ₹500 crore. However, in order to obtain the complete list of the companies, quickly go to Ticker and find the exhaustive list of high debt companies.

Basically, the way you can filter high-debt companies is by using financial ratios. And in this blog, we will be focusing on 5 key ratios. They are as follows. 

Debt Ratio

The debt ratio tells us how leveraged a company is. It compares the assets and liabilities of a company and offers us insight into the debt conditions of the company. A ratio lesser than 1 is always preferable. However, companies that operate in the capital-intensive sector may have a lower ratio. Hence peer-to-peer comparison might be an ideal way ahead. 

The formula for the calculation of Debt Ratio is as follows, 

Debt ratio = Total debt / Total assets 

It shows investors how much of the assets are funded by debts. And also, a high debt ratio means it's a risky bet, and the investors will have to exercise high caution in those cases. 

Interest Coverage Ratio

Next in line is the Interest Coverage Ratio (ICR). Whenever you borrow money, it is not just the principal that comes haunting you with time. But along with it comes the interest. And in the case of firms, both are going to be huge. Failure to meet the same might leave the company in a difficult situation. Hence, checking if the company will be able to pay back the enormous interest becomes crucial.

Also, when there is a hike in interest rates, certain companies may fall back on the ability to repay its debts. And the ICR helps you identify and locate the same. The formula to calculate the same is as follows,

ICR = EBIT / Interest expense

Where EBIT, or the Earnings Before Interest and Tax, is the company profits from its operations, and the interest expenses include the interest payable on the borrowed principal. A higher ratio is always a good sign.

Operating Cash to Total Debt Ratio

When you have a good inflow of cash, repaying Debt becomes easy. On the other hand, when your main line of business itself is bringing in meagre profits, then paying interests becomes impossible, let alone the principal. The operating cash-to-debt ratio compares a company's operating cash flow with that of its Debt. This ratio answers the most crucial question, "What's the probability of default?"

The procedure to calculate the same is mentioned below,

Operating Cash to Total Debt Ratio = Cash flow from operations / Total Debt 

Where total Debt refers to all short and long-term debt. A higher ratio indicates a lower default probability and vice versa. 

Debt to Tangible Net Worth Ratio

Let's assume a company, XYZ, has become insolvent. Now, the officials have planned to wrap up the business. In such a scenario, if the company has a debt much more than its assets, even selling them wouldn't suffice to clear the enormous Debt. Hence, knowing if the company will be able to meet its creditor's demand becomes crucial for investors. That is where the Debt to tangible net worth ratio comes into play.

Debt to Tangible Net Worth Ratio = Total liabilities / (Stockholders equity - Intangible assets) 

Cash flow to Debt Ratio 

The longer the period of repaying, the higher the interest will be. Hence, as investors, we would want to know when a particular debt will be paid off, excluding the non-controllable factors. And the cash flow to debt ratio helps us in finding the same. The formula is,

Cash flow to Debt Ratio = Cash flow from operations / Total debt 

In this ratio, a peer-to-peer comparison or an industry-level analysis is suggested. Sometimes EBITA is taken for the calculation.

You can look at the company's balance sheets to derive the details for calculating these ratios.

Alternative approach 

All the above-mentioned methods are tedious and require a lot of time. But chill! We have another alternative. It is an effective method that is free, effective and takes seconds to offer the answers to all of your questions. 

All you have to do is visit Ticker by Finology and go to the screener. Now type in "debt Y1 > 20000 and debt to equity Y1 > 2" (you are also offered a comprehensive guide and curated lists to fulfil your needs). And you will get the list of companies in no time.

For instance, your query will look something like this:

And the result, you ask? Well, you've seen it already at the beginning of this article. Isn't it amazing?

The Bottom Line

Whether you choose the latter or the former, simply ensure that you take it with a pinch of salt. Relying on a specific parameter is advisable. However, turning a blind eye to others is not. So, you should ideally use the screener to filter companies based on a set of various criteria and only then come up with your watchlist.

Invest wisely!

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.