These 4 Measures Indicate That Kothari Sugars and Chemicals (NSE:KOTARISUG) Is Using Debt Safely

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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kothari Sugars and Chemicals

What Is Kothari Sugars and Chemicals's Debt?

As you can see below, at the end of March 2022, Kothari Sugars and Chemicals had ₹559.7m of debt, up from ₹358.9m a year ago. Click the image for more detail. But it also has ₹717.2m in cash to offset that, meaning it has ₹157.5m net cash.

A Look At Kothari Sugars and Chemicals' Liabilities

We can see from the most recent balance sheet that Kothari Sugars and Chemicals had liabilities of ₹1.46b falling due within a year, and liabilities of ₹286.1m due beyond that. Offsetting these obligations, it had cash of ₹717.2m as well as receivables valued at ₹248.3m due within 12 months. So its liabilities total ₹777.5m more than the combination of its cash and short-term receivables.

Kothari Sugars and Chemicals has a market capitalization of ₹3.13b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Kothari Sugars and Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Kothari Sugars and Chemicals grew its EBIT by 89% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kothari Sugars and Chemicals's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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

While Kothari Sugars and Chemicals does have more liabilities than liquid assets, it also has net cash of ₹157.5m. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in -₹69m. So is Kothari Sugars and Chemicals's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kothari Sugars and Chemicals is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.