Does SKM Egg Products Export (India) (NSE:SKMEGGPROD) Have A Healthy Balance Sheet?

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.' 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. We note that SKM Egg Products Export (India) Limited (NSE:SKMEGGPROD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for SKM Egg Products Export (India)

What Is SKM Egg Products Export (India)'s Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 SKM Egg Products Export (India) had debt of ₹1.36b, up from ₹879.8m in one year. But it also has ₹1.47b in cash to offset that, meaning it has ₹106.2m net cash.

How Strong Is SKM Egg Products Export (India)'s Balance Sheet?

We can see from the most recent balance sheet that SKM Egg Products Export (India) had liabilities of ₹1.29b falling due within a year, and liabilities of ₹622.8m due beyond that. On the other hand, it had cash of ₹1.47b and ₹421.2m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to SKM Egg Products Export (India)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹7.30b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, SKM Egg Products Export (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that SKM Egg Products Export (India) saw its EBIT decline by 3.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SKM Egg Products Export (India) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SKM Egg Products Export (India) 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. Looking at the most recent three years, SKM Egg Products Export (India) recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that SKM Egg Products Export (India) has ₹106.2m in net cash. So we are not troubled with SKM Egg Products Export (India)'s debt use. 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 SKM Egg Products Export (India) you should be aware of, and 1 of them makes us a bit uncomfortable.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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