K.C.P. Sugar and Industries (NSE:KCPSUGIND) 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.' 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. Importantly, K.C.P. Sugar and Industries Corporation Limited (NSE:KCPSUGIND) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out our latest analysis for K.C.P. Sugar and Industries

What Is K.C.P. Sugar and Industries's Net Debt?

The image below, which you can click on for greater detail, shows that K.C.P. Sugar and Industries had debt of ₹748.7m at the end of September 2024, a reduction from ₹912.9m over a year. But it also has ₹1.22b in cash to offset that, meaning it has ₹466.5m net cash.

A Look At K.C.P. Sugar and Industries' Liabilities

We can see from the most recent balance sheet that K.C.P. Sugar and Industries had liabilities of ₹744.6m falling due within a year, and liabilities of ₹660.0m due beyond that. Offsetting these obligations, it had cash of ₹1.22b as well as receivables valued at ₹315.5m due within 12 months. So it can boast ₹126.1m more liquid assets than total liabilities.

This short term liquidity is a sign that K.C.P. Sugar and Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that K.C.P. Sugar and Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact K.C.P. Sugar and Industries's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is K.C.P. Sugar and 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 K.C.P. Sugar and 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. Over the last three years, K.C.P. Sugar and Industries actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that K.C.P. Sugar and Industries has net cash of ₹466.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 276% of that EBIT to free cash flow, bringing in -₹39m. So we don't have any problem with K.C.P. Sugar and Industries's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for K.C.P. Sugar and Industries that you should be aware of.

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.