We Think L.G. Balakrishnan & Bros (NSE:LGBBROSLTD) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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

How Much Debt Does L.G. Balakrishnan & Bros Carry?

The image below, which you can click on for greater detail, shows that at March 2022 L.G. Balakrishnan & Bros had debt of ₹899.6m, up from ₹708.6m in one year. However, its balance sheet shows it holds ₹2.87b in cash, so it actually has ₹1.97b net cash.

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

The latest balance sheet data shows that L.G. Balakrishnan & Bros had liabilities of ₹5.15b due within a year, and liabilities of ₹595.4m falling due after that. On the other hand, it had cash of ₹2.87b and ₹2.94b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that L.G. Balakrishnan & Bros' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹18.2b 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 79%, 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. L.G. Balakrishnan & Bros 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, L.G. Balakrishnan & Bros produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case L.G. Balakrishnan & Bros has ₹1.97b in net cash and a decent-looking balance sheet. And we liked the look of last year's 79% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that L.G. Balakrishnan & Bros is showing 1 warning sign in our investment analysis , you should know about...

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.