Banco Products (India) (NSE:BANCOINDIA) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Banco Products (India) Limited (NSE:BANCOINDIA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Banco Products (India)

How Much Debt Does Banco Products (India) Carry?

As you can see below, Banco Products (India) had ₹137.2m of debt at March 2021, down from ₹916.5m a year prior. However, it does have ₹1.27b in cash offsetting this, leading to net cash of ₹1.14b.

How Healthy Is Banco Products (India)'s Balance Sheet?

We can see from the most recent balance sheet that Banco Products (India) had liabilities of ₹3.07b falling due within a year, and liabilities of ₹799.3m due beyond that. On the other hand, it had cash of ₹1.27b and ₹2.70b worth of receivables due within a year. So it can boast ₹109.3m more liquid assets than total liabilities.

This state of affairs indicates that Banco Products (India)'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 ₹11.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Banco Products (India) has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Banco Products (India) has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Banco Products (India) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Banco Products (India) 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. In the last three years, Banco Products (India)'s free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Banco Products (India) has ₹1.14b in net cash and a decent-looking balance sheet. And we liked the look of last year's 48% year-on-year EBIT growth. So we don't think Banco Products (India)'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. Be aware that Banco Products (India) is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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