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Companies with High Debtors

Companies that are in a delicate position, even though they have high debtors, because any default or delays could impact their books adversely

   

Investing in companies with high debtors may be tempting, because debtors are the assets which the company expects to realise over the period for the sales made on credit to the customers. However, doing so is loaded with risks. We short-listed companies that have substantial debtors, which forms more than 50 per cent of the total assets of the company and have negative cash flow from operating activities.

Such companies operate in a very delicate position because there is the fear of defaults by major debtors or even delays, which could send their books to doldrums. On analysing the companies we figured that these debtors are almost equal or are more than the net worth of the companies. This means any defaulting client could throw the company into negative net worth.

Although these companies may continue to operate without any issues; they are risky to invest. The reason for such risks stems from the fact that a company's physical assets, inventories, though realisable at any point of time, many not be 100 per cent realisable in short notice in extreme cases.

The lesson: having substantial debtors compared to total assets defies the 'bird in hand' theory. It is better to have assets in hand than that is assumed for future. Moreover, having high debtors also puts strain on the working capital because the cash which could have been utilised after the sales is still not available. And, when the cash from operations is negative; it puts the company in a state where it then depends on loans for even day to day operations.

Companies with substantial debtors

Company NameDebtors (₹cr)Net Worth (₹cr)Total Assets (₹cr)Cash from Operations (₹cr)
Atlas Jewellery India727375-68
SRG Housing Finance191320-11
Pearl Electronics311139-10
Nouveau Global Ventures12046157-16
High Ground Enterprise249320
Kwality10092851373-110
North Eastern Carrying9955136-15
Sujana Metal Products23698703315-323
Goenka Diamond & Jewels473327680-19
Trigyn Technologies9698139-1
Jyoti46581809-37
Ram Ratna Wires12354215-3
Surana Corporation11184292003-1177
Sudar Industries237164428-41
Timex Group India69-3129-5
Ashapura Intimates Fashion8418160-20
KEC International380811927390-9
Vikas GlobalOne6938135-8
Data as per the annual reports of financial year 2014