Balmer Lawrie (NSE:BALMLAWRIE) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Balmer Lawrie & Co. Ltd. (NSE:BALMLAWRIE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Balmer Lawrie

How Much Debt Does Balmer Lawrie Carry?

As you can see below, Balmer Lawrie had ₹1.24b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹3.34b in cash, leading to a ₹2.10b net cash position.

How Strong Is Balmer Lawrie's Balance Sheet?

The latest balance sheet data shows that Balmer Lawrie had liabilities of ₹7.79b due within a year, and liabilities of ₹3.16b falling due after that. Offsetting these obligations, it had cash of ₹3.34b as well as receivables valued at ₹5.58b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.04b.

Given Balmer Lawrie has a market capitalization of ₹30.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Balmer Lawrie boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Balmer Lawrie grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its 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 Balmer Lawrie will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Balmer Lawrie 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. During the last three years, Balmer Lawrie produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. 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 look at a company's total liabilities, it is very reassuring that Balmer Lawrie has ₹2.10b in net cash. And it impressed us with its EBIT growth of 33% over the last year. So we don't think Balmer Lawrie's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Balmer Lawrie you should know about.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.