Balrampur Chini Mills (NSE:BALRAMCHIN) Could Easily Take On More Debt

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. We note that Balrampur Chini Mills Limited (NSE:BALRAMCHIN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Balrampur Chini Mills

How Much Debt Does Balrampur Chini Mills Carry?

The chart below, which you can click on for greater detail, shows that Balrampur Chini Mills had ₹3.05b in debt in September 2021; about the same as the year before. However, its balance sheet shows it holds ₹3.09b in cash, so it actually has ₹35.9m net cash.

How Healthy Is Balrampur Chini Mills' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Balrampur Chini Mills had liabilities of ₹2.89b due within 12 months and liabilities of ₹2.92b due beyond that. Offsetting this, it had ₹3.09b in cash and ₹837.1m in receivables that were due within 12 months. So its liabilities total ₹1.88b more than the combination of its cash and short-term receivables.

Of course, Balrampur Chini Mills has a market capitalization of ₹90.8b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Balrampur Chini Mills boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Balrampur Chini Mills grew its EBIT by 15% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Balrampur Chini Mills'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Balrampur Chini Mills 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 three years, Balrampur Chini Mills recorded free cash flow worth a fulsome 80% 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

We could understand if investors are concerned about Balrampur Chini Mills's liabilities, but we can be reassured by the fact it has has net cash of ₹35.9m. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in ₹5.5b. So we don't think Balrampur Chini Mills's use of debt is risky. 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. We've identified 3 warning signs with Balrampur Chini Mills (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.