Is Apcotex Industries (NSE:APCOTEXIND) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Apcotex Industries Limited (NSE:APCOTEXIND) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Apcotex Industries

How Much Debt Does Apcotex Industries Carry?

The chart below, which you can click on for greater detail, shows that Apcotex Industries had ₹311.8m in debt in September 2020; about the same as the year before. But it also has ₹468.5m in cash to offset that, meaning it has ₹156.7m net cash.

How Healthy Is Apcotex Industries's Balance Sheet?

According to the last reported balance sheet, Apcotex Industries had liabilities of ₹937.9m due within 12 months, and liabilities of ₹367.3m due beyond 12 months. Offsetting this, it had ₹468.5m in cash and ₹856.9m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Apcotex Industries's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹8.80b company is short on cash, but still worth keeping an eye on the 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.

The modesty of its debt load may become crucial for Apcotex Industries if management cannot prevent a repeat of the 81% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Apcotex Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Apcotex Industries 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 most recent three years, Apcotex Industries recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Apcotex Industries has ₹156.7m in net cash and a decent-looking balance sheet. So we don't have any problem with Apcotex Industries's use of debt. 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 2 warning signs for Apcotex Industries that you should be aware of.

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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