Shalby (NSE:SHALBY) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Shalby Limited (NSE:SHALBY) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. 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.

View our latest analysis for Shalby

What Is Shalby's Net Debt?

As you can see below, Shalby had ₹508.9m of debt at September 2020, down from ₹547.2m a year prior. However, it does have ₹1.14b in cash offsetting this, leading to net cash of ₹632.1m.

How Healthy Is Shalby's Balance Sheet?

According to the last reported balance sheet, Shalby had liabilities of ₹803.1m due within 12 months, and liabilities of ₹674.4m due beyond 12 months. Offsetting this, it had ₹1.14b in cash and ₹846.3m in receivables that were due within 12 months. So it actually has ₹509.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Shalby could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shalby has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Shalby if management cannot prevent a repeat of the 62% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shalby can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shalby 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, Shalby recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Shalby has net cash of ₹632.1m, as well as more liquid assets than liabilities. So we are not troubled with Shalby's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Shalby you should be aware of.

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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