Andhra Paper (NSE:ANDHRAPAP) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Andhra Paper Limited (NSE:ANDHRAPAP) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Andhra Paper

What Is Andhra Paper's Debt?

As you can see below, at the end of September 2021, Andhra Paper had ₹762.5m of debt, up from ₹213.6m a year ago. Click the image for more detail. But it also has ₹2.44b in cash to offset that, meaning it has ₹1.68b net cash.

A Look At Andhra Paper's Liabilities

Zooming in on the latest balance sheet data, we can see that Andhra Paper had liabilities of ₹2.85b due within 12 months and liabilities of ₹1.06b due beyond that. On the other hand, it had cash of ₹2.44b and ₹1.99b worth of receivables due within a year. So it can boast ₹528.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Andhra Paper could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Andhra Paper boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Andhra Paper made a loss at the EBIT level, last year, it was also good to see that it generated ₹1.3b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Andhra Paper's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Andhra Paper 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. Over the last year, Andhra Paper actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Andhra Paper has net cash of ₹1.68b, as well as more liquid assets than liabilities. The cherry on top was that in converted 150% of that EBIT to free cash flow, bringing in ₹1.9b. So is Andhra Paper's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Andhra Paper you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.