Here's Why Agro Phos (India) (NSE:AGROPHOS) Has A Meaningful Debt Burden

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Agro Phos (India) Limited (NSE:AGROPHOS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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. 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. 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 Agro Phos (India)'s Debt?

As you can see below, Agro Phos (India) had ₹282.0m of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₹11.7m in cash, and so its net debt is ₹270.3m.

How Strong Is Agro Phos (India)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Agro Phos (India) had liabilities of ₹893.0m due within 12 months and liabilities of ₹32.2m due beyond that. Offsetting this, it had ₹11.7m in cash and ₹223.1m in receivables that were due within 12 months. So it has liabilities totalling ₹690.5m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹830.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

See our latest analysis for Agro Phos (India)

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Agro Phos (India) has net debt worth 1.8 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 3.4 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. Notably, Agro Phos (India) made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹129m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Agro Phos (India) will need earnings to service that debt. 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 it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. In the last year, Agro Phos (India)'s free cash flow amounted to 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

At the end of the day, we're far from enamoured with Agro Phos (India)'s ability to cover its interest expense with its EBIT or to handle its total liabilities. But its net debt to EBITDA is a slight positive. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Agro Phos (India) stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Agro Phos (India) has 4 warning signs (and 3 which make us uncomfortable) we think you should know about.

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.