Patanjali Foods (NSE:PATANJALI) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Patanjali Foods Limited (NSE:PATANJALI) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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.

View our latest analysis for Patanjali Foods

What Is Patanjali Foods's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Patanjali Foods had ₹11.2b of debt in September 2024, down from ₹12.6b, one year before. However, its balance sheet shows it holds ₹26.3b in cash, so it actually has ₹15.2b net cash.

How Strong Is Patanjali Foods' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Patanjali Foods had liabilities of ₹30.8b due within 12 months and liabilities of ₹1.18b due beyond that. On the other hand, it had cash of ₹26.3b and ₹10.0b worth of receivables due within a year. So it can boast ₹4.43b more liquid assets than total liabilities.

Having regard to Patanjali Foods' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹665.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Patanjali Foods boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Patanjali Foods grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Patanjali Foods's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Patanjali Foods 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 most recent three years, Patanjali Foods recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Patanjali Foods has ₹15.2b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 26% over the last year. So is Patanjali Foods's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Patanjali Foods, you may well want to click here to check an interactive graph of its earnings per share history.

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.