Here's Why ShreeOswal Seeds and Chemicals (NSE:OSWALSEEDS) Is Weighed Down By Its Debt Load

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ShreeOswal Seeds and Chemicals Limited (NSE:OSWALSEEDS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ShreeOswal Seeds and Chemicals

What Is ShreeOswal Seeds and Chemicals's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 ShreeOswal Seeds and Chemicals had debt of ₹638.6m, up from ₹410.3m in one year. On the flip side, it has ₹29.9m in cash leading to net debt of about ₹608.7m.

How Strong Is ShreeOswal Seeds and Chemicals' Balance Sheet?

The latest balance sheet data shows that ShreeOswal Seeds and Chemicals had liabilities of ₹831.3m due within a year, and liabilities of ₹7.32m falling due after that. Offsetting these obligations, it had cash of ₹29.9m as well as receivables valued at ₹188.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹620.4m.

ShreeOswal Seeds and Chemicals has a market capitalization of ₹2.54b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.081 times and a disturbingly high net debt to EBITDA ratio of 60.5 hit our confidence in ShreeOswal Seeds and Chemicals like a one-two punch to the gut. The debt burden here is substantial. Worse, ShreeOswal Seeds and Chemicals's EBIT was down 96% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ShreeOswal Seeds 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, ShreeOswal Seeds and Chemicals burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both ShreeOswal Seeds and Chemicals's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But at least its level of total liabilities is not so bad. Overall, it seems to us that ShreeOswal Seeds and Chemicals's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example ShreeOswal Seeds and Chemicals has 4 warning signs (and 2 which are significant) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com