Mrs. Bectors Food Specialities (NSE:BECTORFOOD) Seems To Use Debt Quite Sensibly

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 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. As with many other companies Mrs. Bectors Food Specialities Limited (NSE:BECTORFOOD) makes use of debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Mrs. Bectors Food Specialities's Net Debt?

As you can see below, Mrs. Bectors Food Specialities had ₹1.47b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹3.63b in cash, so it actually has ₹2.15b net cash.

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

According to the last reported balance sheet, Mrs. Bectors Food Specialities had liabilities of ₹2.68b due within 12 months, and liabilities of ₹1.18b due beyond 12 months. On the other hand, it had cash of ₹3.63b and ₹1.77b worth of receivables due within a year. 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 ₹90.5b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Mrs. Bectors Food Specialities has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Mrs. Bectors Food Specialities

The good news is that Mrs. Bectors Food Specialities has increased its EBIT by 4.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mrs. Bectors Food Specialities's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. Mrs. Bectors Food Specialities 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, Mrs. Bectors Food Specialities recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mrs. Bectors Food Specialities has ₹2.15b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 4.9% in the last twelve months. So we don't have any problem with Mrs. Bectors Food Specialities's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Mrs. Bectors Food Specialities , 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.