Is IFB Agro Industries (NSE:IFBAGRO) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, IFB Agro Industries Limited (NSE:IFBAGRO) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for IFB Agro Industries

How Much Debt Does IFB Agro Industries Carry?

The image below, which you can click on for greater detail, shows that IFB Agro Industries had debt of ₹187.6m at the end of March 2023, a reduction from ₹217.4m over a year. But on the other hand it also has ₹2.07b in cash, leading to a ₹1.88b net cash position.

How Strong Is IFB Agro Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IFB Agro Industries had liabilities of ₹535.9m due within 12 months and liabilities of ₹300.0m due beyond that. Offsetting this, it had ₹2.07b in cash and ₹521.1m in receivables that were due within 12 months. So it can boast ₹1.75b more liquid assets than total liabilities.

This surplus strongly suggests that IFB Agro Industries has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, IFB Agro Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, IFB Agro Industries's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is IFB Agro Industries's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While IFB Agro Industries 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. During the last three years, IFB Agro Industries produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case IFB Agro Industries has ₹1.88b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 66% of that EBIT to free cash flow, bringing in ₹183m. So we don't think IFB Agro Industries's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for IFB Agro Industries you should know about.

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.