These 4 Measures Indicate That Mrs. Bectors Food Specialities (NSE:BECTORFOOD) Is Using Debt Reasonably Well

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. Importantly, Mrs. Bectors Food Specialities Limited (NSE:BECTORFOOD) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 at March 2024 Mrs. Bectors Food Specialities had debt of ₹2.25b, up from ₹1.21b in one year. However, because it has a cash reserve of ₹1.27b, its net debt is less, at about ₹974.7m.

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

We can see from the most recent balance sheet that Mrs. Bectors Food Specialities had liabilities of ₹2.45b falling due within a year, and liabilities of ₹1.93b due beyond that. Offsetting these obligations, it had cash of ₹1.27b as well as receivables valued at ₹1.34b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.77b.

Given Mrs. Bectors Food Specialities has a market capitalization of ₹83.6b, 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. Carrying virtually no net debt, Mrs. Bectors Food Specialities has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Mrs. Bectors Food Specialities's net debt is only 0.37 times its EBITDA. And its EBIT easily covers its interest expense, being 16.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Mrs. Bectors Food Specialities grew its EBIT by 64% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Mrs. Bectors Food Specialities created free cash flow amounting to 4.2% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

The good news is that Mrs. Bectors Food Specialities's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. Taking all this data into account, it seems to us that Mrs. Bectors Food Specialities takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Mrs. Bectors Food Specialities that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.