Here's Why Mrs. Bectors Food Specialities (NSE:BECTORFOOD) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Mrs. Bectors Food Specialities Limited (NSE:BECTORFOOD) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Mrs. Bectors Food Specialities

How Much Debt Does Mrs. Bectors Food Specialities Carry?

The image below, which you can click on for greater detail, shows that Mrs. Bectors Food Specialities had debt of ₹1.12b at the end of September 2024, a reduction from ₹1.45b over a year. However, it does have ₹3.63b in cash offsetting this, leading to net cash of ₹2.51b.

How Healthy Is Mrs. Bectors Food Specialities' Balance Sheet?

We can see from the most recent balance sheet that Mrs. Bectors Food Specialities had liabilities of ₹2.68b falling due within a year, and liabilities of ₹1.18b due beyond that. Offsetting these obligations, it had cash of ₹3.63b as well as receivables valued at ₹1.77b due within 12 months. So it can boast ₹1.54b more liquid assets than total liabilities.

Having regard to Mrs. Bectors Food Specialities' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹109.6b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Mrs. Bectors Food Specialities boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Mrs. Bectors Food Specialities grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Mrs. Bectors Food Specialities can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mrs. Bectors Food Specialities 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. Considering the last three years, Mrs. Bectors Food Specialities actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mrs. Bectors Food Specialities has net cash of ₹2.51b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 11% in the last twelve months. So we are not troubled with Mrs. Bectors Food Specialities's debt use. 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 learn about the 2 warning signs we've spotted with Mrs. Bectors Food Specialities (including 1 which is a bit unpleasant) .

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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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.