We Think Banco Products (India) (NSE:BANCOINDIA) Can Manage Its Debt With Ease

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.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Banco Products (India)

What Is Banco Products (India)'s Debt?

As you can see below, at the end of September 2020, Banco Products (India) had ₹930.1m of debt, up from ₹739.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹1.84b in cash, so it actually has ₹914.7m net cash.

A Look At Banco Products (India)'s Liabilities

We can see from the most recent balance sheet that Banco Products (India) had liabilities of ₹2.77b falling due within a year, and liabilities of ₹865.1m due beyond that. Offsetting these obligations, it had cash of ₹1.84b as well as receivables valued at ₹2.83b due within 12 months. So it can boast ₹1.04b more liquid assets than total liabilities.

This short term liquidity is a sign that Banco Products (India) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Banco Products (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Banco Products (India) grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Banco Products (India)'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Banco Products (India) 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, Banco Products (India) recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Banco Products (India) has ₹914.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 20% over the last year. So is Banco Products (India)'s debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Banco Products (India) is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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