These 4 Measures Indicate That ShreeOswal Seeds and Chemicals (NSE:OSWALSEEDS) Is Using Debt Extensively

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. Importantly, ShreeOswal Seeds and Chemicals Limited (NSE:OSWALSEEDS) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ShreeOswal Seeds and Chemicals

How Much Debt Does ShreeOswal Seeds and Chemicals Carry?

As you can see below, at the end of September 2021, ShreeOswal Seeds and Chemicals had ₹472.2m of debt, up from ₹302.1m a year ago. Click the image for more detail. However, it does have ₹86.0m in cash offsetting this, leading to net debt of about ₹386.3m.

A Look At ShreeOswal Seeds and Chemicals' Liabilities

We can see from the most recent balance sheet that ShreeOswal Seeds and Chemicals had liabilities of ₹402.4m falling due within a year, and liabilities of ₹204.0m due beyond that. Offsetting these obligations, it had cash of ₹86.0m as well as receivables valued at ₹183.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹336.6m.

This deficit isn't so bad because ShreeOswal Seeds and Chemicals is worth ₹689.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

ShreeOswal Seeds and Chemicals has a debt to EBITDA ratio of 3.6 and its EBIT covered its interest expense 3.7 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. On the other hand, ShreeOswal Seeds and Chemicals grew its EBIT by 25% in the last year. If it can maintain that kind of improvement, its debt load will begin to melt away like glaciers in a warming world. When analysing debt levels, the balance sheet is the obvious place to start. But it is ShreeOswal Seeds 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.

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. In the last three years, ShreeOswal Seeds and Chemicals created free cash flow amounting to 9.4% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

ShreeOswal Seeds and Chemicals's conversion of EBIT to free cash flow and net debt to EBITDA definitely weigh on it, in our esteem. But its EBIT growth rate tells a very different story, and suggests some resilience. Looking at all the angles mentioned above, it does seem to us that ShreeOswal Seeds and Chemicals is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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 3 warning signs for ShreeOswal Seeds and Chemicals you should be aware of, and 2 of them are potentially serious.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.