Is IFB Industries (NSE:IFBIND) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that IFB Industries Limited (NSE:IFBIND) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

Check out 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 ₹2.47b at the end of September 2021, a reduction from ₹2.80b over a year. But on the other hand it also has ₹3.34b in cash, leading to a ₹869.6m net cash position.

How Healthy Is IFB Industries' Balance Sheet?

We can see from the most recent balance sheet that IFB Industries had liabilities of ₹11.3b falling due within a year, and liabilities of ₹3.47b due beyond that. Offsetting these obligations, it had cash of ₹3.34b as well as receivables valued at ₹3.38b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹8.04b.

Given IFB Industries has a market capitalization of ₹42.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, IFB Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that IFB Industries improved its EBIT from a last year's loss to a positive ₹918m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since IFB Industries will need earnings to service that debt. 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. IFB Industries 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. Over the last year, IFB Industries saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

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 ₹869.6m. So while IFB Industries does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should learn about the 2 warning signs we've spotted with IFB Industries (including 1 which makes us a bit uncomfortable) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.