Balaji Amines (NSE:BALAMINES) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Balaji Amines Limited (NSE:BALAMINES) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Balaji Amines

What Is Balaji Amines's Debt?

The image below, which you can click on for greater detail, shows that Balaji Amines had debt of ₹197.0m at the end of March 2024, a reduction from ₹575.7m over a year. However, its balance sheet shows it holds ₹3.40b in cash, so it actually has ₹3.20b net cash.

A Look At Balaji Amines' Liabilities

We can see from the most recent balance sheet that Balaji Amines had liabilities of ₹1.49b falling due within a year, and liabilities of ₹1.04b due beyond that. On the other hand, it had cash of ₹3.40b and ₹3.20b worth of receivables due within a year. So it actually has ₹4.07b more liquid assets than total liabilities.

This short term liquidity is a sign that Balaji Amines could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Balaji Amines has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Balaji Amines's load is not too heavy, because its EBIT was down 51% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Balaji Amines'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Balaji Amines 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. Looking at the most recent three years, Balaji Amines recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Balaji Amines has ₹3.20b in net cash and a decent-looking balance sheet. So we are not troubled with Balaji Amines's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Balaji Amines 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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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.