Does IFB Industries (NSE:IFBIND) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that IFB Industries Limited (NSE:IFBIND) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 IFB Industries

What Is IFB Industries's Net Debt?

The image below, which you can click on for greater detail, shows that IFB Industries had debt of ₹1.47b at the end of September 2023, a reduction from ₹1.78b over a year. But it also has ₹2.58b in cash to offset that, meaning it has ₹1.11b net cash.

A Look At IFB Industries' Liabilities

We can see from the most recent balance sheet that IFB Industries had liabilities of ₹12.4b falling due within a year, and liabilities of ₹2.70b due beyond that. On the other hand, it had cash of ₹2.58b and ₹4.18b worth of receivables due within a year. So it has liabilities totalling ₹8.37b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since IFB Industries has a market capitalization of ₹37.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, IFB Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, IFB Industries is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 610% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine IFB Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While IFB Industries 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 last three years, IFB Industries actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although IFB Industries's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.11b. And it impressed us with free cash flow of ₹731m, being 140% of its EBIT. So is IFB Industries's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with IFB Industries .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.