Heritage Foods (NSE:HERITGFOOD) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Heritage Foods Limited (NSE:HERITGFOOD) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Heritage Foods

What Is Heritage Foods's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Heritage Foods had ₹1.50b of debt in September 2020, down from ₹1.98b, one year before. However, it does have ₹2.30b in cash offsetting this, leading to net cash of ₹797.3m.

A Look At Heritage Foods's Liabilities

According to the last reported balance sheet, Heritage Foods had liabilities of ₹2.43b due within 12 months, and liabilities of ₹1.91b due beyond 12 months. Offsetting this, it had ₹2.30b in cash and ₹198.0m in receivables that were due within 12 months. So its liabilities total ₹1.84b more than the combination of its cash and short-term receivables.

Of course, Heritage Foods has a market capitalization of ₹13.5b, so these liabilities are probably manageable. 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, Heritage Foods boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Heritage Foods has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Heritage Foods's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Heritage Foods 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, Heritage Foods reported free cash flow worth 7.4% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While Heritage Foods does have more liabilities than liquid assets, it also has net cash of ₹797.3m. And it impressed us with its EBIT growth of 36% over the last year. So we are not troubled with Heritage Foods's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Heritage Foods that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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