Is L.G. Balakrishnan & Bros (NSE:LGBBROSLTD) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 L.G. Balakrishnan & Bros Limited (NSE:LGBBROSLTD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for L.G. Balakrishnan & Bros

What Is L.G. Balakrishnan & Bros's Debt?

As you can see below, at the end of March 2022, L.G. Balakrishnan & Bros had ₹1.00b of debt, up from ₹912.1m a year ago. Click the image for more detail. But on the other hand it also has ₹2.83b in cash, leading to a ₹1.83b net cash position.

How Healthy Is L.G. Balakrishnan & Bros' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that L.G. Balakrishnan & Bros had liabilities of ₹5.15b due within 12 months and liabilities of ₹595.4m due beyond that. On the other hand, it had cash of ₹2.83b and ₹3.00b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to L.G. Balakrishnan & Bros' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹21.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that L.G. Balakrishnan & Bros 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 L.G. Balakrishnan & Bros has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if L.G. Balakrishnan & Bros can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While L.G. Balakrishnan & Bros 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, L.G. Balakrishnan & Bros recorded free cash flow worth 72% 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 L.G. Balakrishnan & Bros has ₹1.83b in net cash and a decent-looking balance sheet. And we liked the look of last year's 53% year-on-year EBIT growth. So we don't think L.G. Balakrishnan & Bros's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for L.G. Balakrishnan & Bros 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. 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.