Stock Analysis

Is Balmer Lawrie (NSE:BALMLAWRIE) Using Too Much Debt?

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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Balmer Lawrie & Co. Ltd. (NSE:BALMLAWRIE) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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

What Is Balmer Lawrie's Net Debt?

As you can see below, Balmer Lawrie had ₹892.5m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹3.53b in cash offsetting this, leading to net cash of ₹2.63b.

NSEI:BALMLAWRIE Debt to Equity History January 31st 2024

How Healthy Is Balmer Lawrie's Balance Sheet?

According to the last reported balance sheet, Balmer Lawrie had liabilities of ₹7.42b due within 12 months, and liabilities of ₹3.05b due beyond 12 months. Offsetting this, it had ₹3.53b in cash and ₹4.67b in receivables that were due within 12 months. So its liabilities total ₹2.28b more than the combination of its cash and short-term receivables.

Given Balmer Lawrie has a market capitalization of ₹48.6b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Balmer Lawrie also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Balmer Lawrie grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Balmer Lawrie'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Balmer Lawrie 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, Balmer Lawrie recorded free cash flow worth 52% 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

We could understand if investors are concerned about Balmer Lawrie's liabilities, but we can be reassured by the fact it has has net cash of ₹2.63b. And it impressed us with its EBIT growth of 28% over the last year. So we don't think Balmer Lawrie'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. We've identified 2 warning signs with Balmer Lawrie , and understanding them should be part of your investment process.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Balmer Lawrie is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.