Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Sree Rayalaseema Hi-Strength Hypo Limited (NSE:SRHHYPOLTD) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sree Rayalaseema Hi-Strength Hypo

How Much Debt Does Sree Rayalaseema Hi-Strength Hypo Carry?

As you can see below, Sree Rayalaseema Hi-Strength Hypo had ₹395.5m of debt at March 2020, down from ₹455.4m a year prior. However, it does have ₹893.8m in cash offsetting this, leading to net cash of ₹498.3m.

A Look At Sree Rayalaseema Hi-Strength Hypo's Liabilities

Zooming in on the latest balance sheet data, we can see that Sree Rayalaseema Hi-Strength Hypo had liabilities of ₹1.15b due within 12 months and liabilities of ₹181.6m due beyond that. Offsetting this, it had ₹893.8m in cash and ₹828.6m in receivables that were due within 12 months. So it can boast ₹389.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Sree Rayalaseema Hi-Strength Hypo could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sree Rayalaseema Hi-Strength Hypo boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Sree Rayalaseema Hi-Strength Hypo grew its EBIT at 16% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sree Rayalaseema Hi-Strength Hypo will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sree Rayalaseema Hi-Strength Hypo has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Sree Rayalaseema Hi-Strength Hypo recorded free cash flow worth 80% 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 it is always sensible to investigate a company's debt, in this case Sree Rayalaseema Hi-Strength Hypo has ₹498.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹898m, being 80% of its EBIT. So we don't think Sree Rayalaseema Hi-Strength Hypo's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Sree Rayalaseema Hi-Strength Hypo you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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