Is Sukhjit Starch & Chemicals (NSE:SUKHJITS) A Risky Investment?

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. We can see that The Sukhjit Starch & Chemicals Limited (NSE:SUKHJITS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sukhjit Starch & Chemicals

What Is Sukhjit Starch & Chemicals's Debt?

The chart below, which you can click on for greater detail, shows that Sukhjit Starch & Chemicals had ₹3.46b in debt in September 2024; about the same as the year before. However, it also had ₹859.2m in cash, and so its net debt is ₹2.61b.

A Look At Sukhjit Starch & Chemicals' Liabilities

We can see from the most recent balance sheet that Sukhjit Starch & Chemicals had liabilities of ₹3.40b falling due within a year, and liabilities of ₹1.81b due beyond that. On the other hand, it had cash of ₹859.2m and ₹863.8m worth of receivables due within a year. So it has liabilities totalling ₹3.48b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Sukhjit Starch & Chemicals is worth ₹9.21b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Sukhjit Starch & Chemicals has net debt worth 1.9 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 3.1 times the interest expense. While these numbers do not alarm us, it's worth noting that the cost of the company's debt is having a real impact. We saw Sukhjit Starch & Chemicals grow its EBIT by 3.6% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sukhjit Starch & Chemicals'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. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Sukhjit Starch & Chemicals's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Both Sukhjit Starch & Chemicals's interest cover and its conversion of EBIT to free cash flow were discouraging. But its not so bad at growing its EBIT. Taking the abovementioned factors together we do think Sukhjit Starch & Chemicals's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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. To that end, you should be aware of the 2 warning signs we've spotted with Sukhjit Starch & Chemicals .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.