Does Kothari Sugars and Chemicals (NSE:KOTARISUG) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Kothari Sugars and Chemicals Limited (NSE:KOTARISUG) makes use of 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kothari Sugars and Chemicals

What Is Kothari Sugars and Chemicals's Debt?

The image below, which you can click on for greater detail, shows that Kothari Sugars and Chemicals had debt of ₹306.2m at the end of September 2021, a reduction from ₹592.1m over a year. But it also has ₹607.7m in cash to offset that, meaning it has ₹301.5m net cash.

A Look At Kothari Sugars and Chemicals' Liabilities

The latest balance sheet data shows that Kothari Sugars and Chemicals had liabilities of ₹834.8m due within a year, and liabilities of ₹332.5m falling due after that. Offsetting this, it had ₹607.7m in cash and ₹148.0m in receivables that were due within 12 months. So its liabilities total ₹411.5m more than the combination of its cash and short-term receivables.

Since publicly traded Kothari Sugars and Chemicals shares are worth a total of ₹2.82b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Kothari Sugars and Chemicals also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Kothari Sugars and Chemicals's EBIT launched higher than Elon Musk, gaining a whopping 171% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kothari Sugars and Chemicals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Kothari Sugars and Chemicals 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, Kothari Sugars and Chemicals actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Kothari Sugars and Chemicals's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹301.5m. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in ₹540m. So we don't think Kothari Sugars and Chemicals'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. For instance, we've identified 2 warning signs for Kothari Sugars and Chemicals that you should be aware of.

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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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.