IOL Chemicals and Pharmaceuticals (NSE:IOLCP) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies IOL Chemicals and Pharmaceuticals Limited (NSE:IOLCP) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for IOL Chemicals and Pharmaceuticals

How Much Debt Does IOL Chemicals and Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that IOL Chemicals and Pharmaceuticals had ₹559.2m of debt in March 2020, down from ₹2.84b, one year before. However, it does have ₹1.55b in cash offsetting this, leading to net cash of ₹987.8m.

A Look At IOL Chemicals and Pharmaceuticals's Liabilities

The latest balance sheet data shows that IOL Chemicals and Pharmaceuticals had liabilities of ₹2.82b due within a year, and liabilities of ₹797.3m falling due after that. On the other hand, it had cash of ₹1.55b and ₹2.85b worth of receivables due within a year. So it actually has ₹776.1m more liquid assets than total liabilities.

This state of affairs indicates that IOL Chemicals and Pharmaceuticals's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹42.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, IOL Chemicals and Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, IOL Chemicals and Pharmaceuticals grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is IOL Chemicals and Pharmaceuticals's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. IOL Chemicals and Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, IOL Chemicals and Pharmaceuticals recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that IOL Chemicals and Pharmaceuticals has net cash of ₹987.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% over the last year. So we don't think IOL Chemicals and Pharmaceuticals's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for IOL Chemicals and Pharmaceuticals you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you’re looking to trade IOL Chemicals and Pharmaceuticals, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.