Is Balmer Lawrie (NSE:BALMLAWRIE) A Risky Investment?

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.' 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 note that Balmer Lawrie & Co. Ltd. (NSE:BALMLAWRIE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Balmer Lawrie

What Is Balmer Lawrie's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Balmer Lawrie had ₹975.0m of debt in September 2020, down from ₹1.53b, one year before. However, it does have ₹6.06b in cash offsetting this, leading to net cash of ₹5.09b.

A Look At Balmer Lawrie's Liabilities

Zooming in on the latest balance sheet data, we can see that Balmer Lawrie had liabilities of ₹5.17b due within 12 months and liabilities of ₹2.46b due beyond that. On the other hand, it had cash of ₹6.06b and ₹2.66b worth of receivables due within a year. So it can boast ₹1.10b more liquid assets than total liabilities.

This short term liquidity is a sign that Balmer Lawrie could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Balmer Lawrie has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Balmer Lawrie's saving grace is its low debt levels, because its EBIT has tanked 68% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Balmer Lawrie's earnings that will influence how the balance sheet holds up in the future. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 77% 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 investigate a company's debt, in this case Balmer Lawrie has ₹5.09b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹2.2b, being 77% of its EBIT. So we don't have any problem with Balmer Lawrie's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Balmer Lawrie (1 is a bit concerning!) that you should be aware of before investing here.

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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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.
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