Is Heritage Foods (NSE:HERITGFOOD) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Heritage Foods Limited (NSE:HERITGFOOD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Heritage Foods

What Is Heritage Foods's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Heritage Foods had ₹1.04b of debt, an increase on ₹236.3m, over one year. But it also has ₹3.65b in cash to offset that, meaning it has ₹2.61b net cash.

How Strong Is Heritage Foods' Balance Sheet?

We can see from the most recent balance sheet that Heritage Foods had liabilities of ₹3.19b falling due within a year, and liabilities of ₹1.79b due beyond that. Offsetting this, it had ₹3.65b in cash and ₹444.2m in receivables that were due within 12 months. So its liabilities total ₹878.8m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Heritage Foods' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹52.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Heritage Foods also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Heritage Foods grew its EBIT by 120% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 most recent three years, Heritage Foods recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Heritage Foods has ₹2.61b in net cash. And it impressed us with its EBIT growth of 120% over the last year. So is Heritage Foods's debt a risk? It doesn't seem so to us. 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 - Heritage Foods has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.