KRBL (NSE:KRBL) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 KRBL Limited (NSE:KRBL) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for KRBL

What Is KRBL's Debt?

As you can see below, KRBL had ₹1.03b of debt at September 2020, down from ₹2.66b a year prior. However, its balance sheet shows it holds ₹3.57b in cash, so it actually has ₹2.54b net cash.

How Strong Is KRBL's Balance Sheet?

The latest balance sheet data shows that KRBL had liabilities of ₹4.15b due within a year, and liabilities of ₹2.20b falling due after that. On the other hand, it had cash of ₹3.57b and ₹3.93b worth of receivables due within a year. So it can boast ₹1.13b more liquid assets than total liabilities.

This state of affairs indicates that KRBL's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹58.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, KRBL boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, KRBL grew its EBIT by 2.2% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is KRBL'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. 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. Over the last three years, KRBL reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case KRBL has ₹2.54b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 2.2% over the last year. So we are not troubled with KRBL's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with KRBL , and understanding them should be part of your investment process.

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. 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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