These 4 Measures Indicate That Andhra Sugars (NSE:ANDHRSUGAR) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies The Andhra Sugars Limited (NSE:ANDHRSUGAR) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Andhra Sugars

What Is Andhra Sugars's Net Debt?

As you can see below, Andhra Sugars had ₹708.3m of debt at March 2021, down from ₹2.60b a year prior. However, its balance sheet shows it holds ₹1.97b in cash, so it actually has ₹1.26b net cash.

How Healthy Is Andhra Sugars' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Andhra Sugars had liabilities of ₹2.68b due within 12 months and liabilities of ₹2.22b due beyond that. On the other hand, it had cash of ₹1.97b and ₹2.31b worth of receivables due within a year. So it has liabilities totalling ₹632.7m more than its cash and near-term receivables, combined.

Since publicly traded Andhra Sugars shares are worth a total of ₹16.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Andhra Sugars also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Andhra Sugars's EBIT was down 29% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is Andhra Sugars's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Andhra Sugars 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. Over the most recent three years, Andhra Sugars recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Andhra Sugars's liabilities, but we can be reassured by the fact it has has net cash of ₹1.26b. So we are not troubled with Andhra Sugars'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Andhra Sugars you should know about.

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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