These 4 Measures Indicate That Patanjali Foods (NSE:PATANJALI) Is Using Debt Reasonably Well

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 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. We can see that Patanjali Foods Limited (NSE:PATANJALI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that PATANJALI is potentially overvalued!

How Much Debt Does Patanjali Foods Carry?

As you can see below, Patanjali Foods had ₹5.07b of debt at September 2022, down from ₹36.4b a year prior. However, it does have ₹11.5b in cash offsetting this, leading to net cash of ₹6.47b.

A Look At Patanjali Foods' Liabilities

We can see from the most recent balance sheet that Patanjali Foods had liabilities of ₹31.2b falling due within a year, and liabilities of ₹1.87b due beyond that. Offsetting this, it had ₹11.5b in cash and ₹20.5b in receivables that were due within 12 months. So it has liabilities totalling ₹1.06b more than its cash and near-term receivables, combined.

This state of affairs indicates that Patanjali Foods' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹465.8b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Patanjali Foods also has more cash than debt, so we're pretty confident it can manage its debt safely.

If Patanjali Foods can keep growing EBIT at last year's rate of 13% over the last year, then it will find its debt load easier to manage. There's no doubt that we learn most about debt from the balance sheet. But it is Patanjali Foods'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. While Patanjali Foods has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Patanjali Foods reported free cash flow worth 5.8% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Patanjali Foods has ₹6.47b in net cash. And it also grew its EBIT by 13% over the last year. So we don't have any problem with Patanjali Foods's use of debt. 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. For example - Patanjali Foods has 3 warning signs we think you should be aware of.

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.