Does Bajaj Hindusthan Sugar (NSE:BAJAJHIND) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Bajaj Hindusthan Sugar Limited (NSE:BAJAJHIND) 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bajaj Hindusthan Sugar

What Is Bajaj Hindusthan Sugar's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Bajaj Hindusthan Sugar had ₹48.1b of debt in March 2022, down from ₹54.0b, one year before. However, because it has a cash reserve of ₹19.7b, its net debt is less, at about ₹28.4b.

How Strong Is Bajaj Hindusthan Sugar's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bajaj Hindusthan Sugar had liabilities of ₹59.3b due within 12 months and liabilities of ₹48.6b due beyond that. On the other hand, it had cash of ₹19.7b and ₹6.65b worth of receivables due within a year. So it has liabilities totalling ₹81.5b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹13.3b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Bajaj Hindusthan Sugar would likely require a major re-capitalisation if it had to pay its creditors today. 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 Bajaj Hindusthan Sugar 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.

Over 12 months, Bajaj Hindusthan Sugar made a loss at the EBIT level, and saw its revenue drop to ₹56b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

While Bajaj Hindusthan Sugar's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹433m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹2.7b in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. We've identified 1 warning sign with Bajaj Hindusthan Sugar , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.