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. Importantly, Advanced Enzyme Technologies Limited (NSE:ADVENZYMES) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Advanced Enzyme Technologies's Debt?
You can click the graphic below for the historical numbers, but it shows that Advanced Enzyme Technologies had ₹345.9m of debt in March 2019, down from ₹576.4m, one year before. However, its balance sheet shows it holds ₹1.35b in cash, so it actually has ₹1.01b net cash.
A Look At Advanced Enzyme Technologies's Liabilities
The latest balance sheet data shows that Advanced Enzyme Technologies had liabilities of ₹704.9m due within a year, and liabilities of ₹357.9m falling due after that. On the other hand, it had cash of ₹1.35b and ₹605.4m worth of receivables due within a year. So it actually has ₹895.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Advanced Enzyme Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Advanced Enzyme Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Advanced Enzyme Technologies grew its EBIT by 3.2% in the last year, making that debt load look even more manageable. 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 Advanced Enzyme Technologies 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Advanced Enzyme Technologies 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. During the last three years, Advanced Enzyme Technologies produced sturdy free cash flow equating to 72% 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.
While it is always sensible to investigate a company's debt, in this case Advanced Enzyme Technologies has ₹1.01b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in ₹1.2b. So is Advanced Enzyme Technologies's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Advanced Enzyme Technologies's earnings per share history for free.
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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