These 4 Measures Indicate That IFB Industries (NSE:IFBIND) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, IFB Industries Limited (NSE:IFBIND) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for IFB Industries

What Is IFB Industries's Net Debt?

As you can see below, at the end of September 2020, IFB Industries had ₹2.80b of debt, up from ₹2.53b a year ago. Click the image for more detail. But on the other hand it also has ₹4.35b in cash, leading to a ₹1.55b net cash position.

A Look At IFB Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that IFB Industries had liabilities of ₹7.79b due within 12 months and liabilities of ₹3.82b due beyond that. Offsetting this, it had ₹4.35b in cash and ₹2.43b in receivables that were due within 12 months. So its liabilities total ₹4.83b more than the combination of its cash and short-term receivables.

Since publicly traded IFB Industries shares are worth a total of ₹43.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, IFB Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that IFB Industries's EBIT was down 28% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is IFB Industries'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.

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 recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While IFB Industries does have more liabilities than liquid assets, it also has net cash of ₹1.55b. And it impressed us with free cash flow of ₹1.6b, being 96% of its EBIT. So we are not troubled with IFB Industries's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that IFB Industries is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

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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