Does Apcotex Industries (NSE:APCOTEXIND) Have A Healthy Balance Sheet?

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.' 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 Apcotex Industries Limited (NSE:APCOTEXIND) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Apcotex Industries

What Is Apcotex Industries's Net Debt?

As you can see below, Apcotex Industries had ₹311.8m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₹468.5m in cash to offset that, meaning it has ₹156.7m net cash.

A Look At Apcotex Industries' Liabilities

The latest balance sheet data shows that Apcotex Industries had liabilities of ₹937.9m due within a year, and liabilities of ₹367.3m falling due after that. On the other hand, it had cash of ₹468.5m and ₹856.9m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Apcotex Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹9.57b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Apcotex Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Apcotex Industries grew its EBIT at 19% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Apcotex 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Apcotex Industries 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. Looking at the most recent three years, Apcotex Industries recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Apcotex Industries has net cash of ₹156.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 19% year-on-year EBIT growth. So we don't think Apcotex Industries's use of debt is risky. 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 instance, we've identified 1 warning sign for Apcotex Industries that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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