Simbhaoli Sugars (NSE:SIMBHALS) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, '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 Simbhaoli Sugars Limited (NSE:SIMBHALS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Simbhaoli Sugars

How Much Debt Does Simbhaoli Sugars Carry?

As you can see below, Simbhaoli Sugars had ₹481.5m of debt at March 2021, down from ₹11.1b a year prior. However, its balance sheet shows it holds ₹857.2m in cash, so it actually has ₹375.7m net cash.

A Look At Simbhaoli Sugars' Liabilities

We can see from the most recent balance sheet that Simbhaoli Sugars had liabilities of ₹21.3b falling due within a year, and liabilities of ₹810.5m due beyond that. Offsetting this, it had ₹857.2m in cash and ₹960.9m in receivables that were due within 12 months. So it has liabilities totalling ₹20.3b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹1.48b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Simbhaoli Sugars would probably need a major re-capitalization if its creditors were to demand repayment. Given that Simbhaoli Sugars has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

We also note that Simbhaoli Sugars improved its EBIT from a last year's loss to a positive ₹255m. There's no doubt that we learn most about debt from the balance sheet. But it is Simbhaoli Sugars'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Simbhaoli Sugars 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 year, Simbhaoli Sugars recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While Simbhaoli Sugars does have more liabilities than liquid assets, it also has net cash of ₹375.7m. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in ₹179m. Despite its cash we think that Simbhaoli Sugars seems to struggle to handle its total liabilities, so we are wary of the stock. 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. Case in point: We've spotted 2 warning signs for Simbhaoli Sugars 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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