Bombay Burmah Trading Corporation (NSE:BBTC) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, The Bombay Burmah Trading Corporation, Limited (NSE:BBTC) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bombay Burmah Trading Corporation

What Is Bombay Burmah Trading Corporation's Net Debt?

As you can see below, at the end of March 2021, Bombay Burmah Trading Corporation had ₹26.2b of debt, up from ₹20.3b a year ago. Click the image for more detail. But on the other hand it also has ₹34.1b in cash, leading to a ₹7.96b net cash position.

How Strong Is Bombay Burmah Trading Corporation's Balance Sheet?

The latest balance sheet data shows that Bombay Burmah Trading Corporation had liabilities of ₹38.9b due within a year, and liabilities of ₹12.8b falling due after that. Offsetting this, it had ₹34.1b in cash and ₹12.6b in receivables that were due within 12 months. So its liabilities total ₹4.92b more than the combination of its cash and short-term receivables.

Since publicly traded Bombay Burmah Trading Corporation shares are worth a total of ₹91.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Bombay Burmah Trading Corporation boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Bombay Burmah Trading Corporation grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bombay Burmah Trading Corporation's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Bombay Burmah Trading Corporation 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 most recent three years, Bombay Burmah Trading Corporation recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Bombay Burmah Trading Corporation's liabilities, but we can be reassured by the fact it has has net cash of ₹7.96b. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't think Bombay Burmah Trading Corporation's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. 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 Bombay Burmah Trading Corporation .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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