Atul (NSE:ATUL) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Atul Ltd (NSE:ATUL) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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 Atul

What Is Atul's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Atul had debt of ₹1.33b, up from ₹1.15b in one year. But on the other hand it also has ₹10.9b in cash, leading to a ₹9.53b net cash position.

How Healthy Is Atul's Balance Sheet?

The latest balance sheet data shows that Atul had liabilities of ₹8.06b due within a year, and liabilities of ₹2.74b falling due after that. Offsetting these obligations, it had cash of ₹10.9b as well as receivables valued at ₹8.29b due within 12 months. So it actually has ₹8.35b more liquid assets than total liabilities.

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

Another good sign is that Atul has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Atul 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Atul 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. During the last three years, Atul produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Atul has net cash of ₹9.53b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 23% over the last year. So we don't think Atul's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Atul's earnings per share history for free.

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.
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