Archean Chemical Industries (NSE:ACI) Has A Pretty Healthy Balance Sheet

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.' 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, Archean Chemical Industries Limited (NSE:ACI) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Archean Chemical Industries

How Much Debt Does Archean Chemical Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Archean Chemical Industries had ₹1.16b of debt, an increase on ₹258.7m, over one year. However, it does have ₹4.64b in cash offsetting this, leading to net cash of ₹3.48b.

How Healthy Is Archean Chemical Industries' Balance Sheet?

We can see from the most recent balance sheet that Archean Chemical Industries had liabilities of ₹1.18b falling due within a year, and liabilities of ₹2.77b due beyond that. Offsetting these obligations, it had cash of ₹4.64b as well as receivables valued at ₹1.09b due within 12 months. So it can boast ₹1.78b more liquid assets than total liabilities.

This surplus suggests that Archean Chemical Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Archean Chemical Industries 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 Archean Chemical Industries if management cannot prevent a repeat of the 41% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Archean Chemical Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Archean Chemical Industries 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. During the last three years, Archean Chemical Industries produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Archean Chemical Industries has net cash of ₹3.48b, as well as more liquid assets than liabilities. So we are not troubled with Archean Chemical Industries's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Archean Chemical Industries that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.