Here's Why Bombay Burmah Trading Corporation (NSE:BBTC) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 The Bombay Burmah Trading Corporation, Limited (NSE:BBTC) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Bombay Burmah Trading Corporation

What Is Bombay Burmah Trading Corporation's Debt?

As you can see below, Bombay Burmah Trading Corporation had ₹21.3b of debt at March 2024, down from ₹65.2b a year prior. But on the other hand it also has ₹25.6b in cash, leading to a ₹4.30b net cash position.

A Look At Bombay Burmah Trading Corporation's Liabilities

The latest balance sheet data shows that Bombay Burmah Trading Corporation had liabilities of ₹42.7b due within a year, and liabilities of ₹10.5b falling due after that. Offsetting this, it had ₹25.6b in cash and ₹11.9b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹15.6b.

Given Bombay Burmah Trading Corporation has a market capitalization of ₹159.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Bombay Burmah Trading Corporation also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Bombay Burmah Trading Corporation has increased its EBIT by 6.6% over twelve months, which should ease any concerns about debt repayment. 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 Bombay Burmah Trading Corporation will need earnings to service that debt. 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. Bombay Burmah Trading Corporation 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. Looking at the most recent three years, Bombay Burmah Trading Corporation recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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 ₹4.30b. And it also grew its EBIT by 6.6% over the last year. So we are not troubled with Bombay Burmah Trading Corporation's debt use. 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. For instance, we've identified 2 warning signs for Bombay Burmah Trading Corporation (1 makes us a bit uncomfortable) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com