These 4 Measures Indicate That Nath Bio-Genes (India) (NSE:NATHBIOGEN) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Nath Bio-Genes (India) Limited (NSE:NATHBIOGEN) does carry 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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Nath Bio-Genes (India)

How Much Debt Does Nath Bio-Genes (India) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Nath Bio-Genes (India) had ₹794.7m of debt, an increase on ₹666.0m, over one year. However, it also had ₹203.9m in cash, and so its net debt is ₹590.8m.

How Strong Is Nath Bio-Genes (India)'s Balance Sheet?

According to the last reported balance sheet, Nath Bio-Genes (India) had liabilities of ₹1.05b due within 12 months, and liabilities of ₹38.6m due beyond 12 months. Offsetting these obligations, it had cash of ₹203.9m as well as receivables valued at ₹2.62b due within 12 months. So it can boast ₹1.73b more liquid assets than total liabilities.

This surplus liquidity suggests that Nath Bio-Genes (India)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Nath Bio-Genes (India)'s net debt is only 0.96 times its EBITDA. And its EBIT covers its interest expense a whopping 10.3 times over. So we're pretty relaxed about its super-conservative use of debt. And we also note warmly that Nath Bio-Genes (India) grew its EBIT by 15% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nath Bio-Genes (India)'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 company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Nath Bio-Genes (India) burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Nath Bio-Genes (India)'s interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. Taking all this data into account, it seems to us that Nath Bio-Genes (India) takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. Case in point: We've spotted 1 warning sign for Nath Bio-Genes (India) you should be aware of.

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.

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