Does KRBL (NSE:KRBL) Have A 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.' 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, KRBL Limited (NSE:KRBL) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KRBL

How Much Debt Does KRBL Carry?

As you can see below, KRBL had ₹982.1m of debt at September 2021, down from ₹1.03b a year prior. But it also has ₹9.34b in cash to offset that, meaning it has ₹8.36b net cash.

How Strong Is KRBL's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KRBL had liabilities of ₹5.05b due within 12 months and liabilities of ₹1.95b due beyond that. On the other hand, it had cash of ₹9.34b and ₹3.82b worth of receivables due within a year. So it actually has ₹6.16b more liquid assets than total liabilities.

This surplus suggests that KRBL has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, KRBL boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, KRBL saw its EBIT drop by 7.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 KRBL 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. KRBL 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. In the last three years, KRBL's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KRBL has net cash of ₹8.36b, as well as more liquid assets than liabilities. So we don't have any problem with KRBL's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in KRBL, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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