Here's Why Balaji Amines (NSE:BALAMINES) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Balaji Amines Limited (NSE:BALAMINES) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Balaji Amines

What Is Balaji Amines's Net Debt?

The image below, which you can click on for greater detail, shows that Balaji Amines had debt of ₹151.5m at the end of September 2024, a reduction from ₹439.4m over a year. However, its balance sheet shows it holds ₹3.17b in cash, so it actually has ₹3.02b net cash.

A Look At Balaji Amines' Liabilities

According to the last reported balance sheet, Balaji Amines had liabilities of ₹1.05b due within 12 months, and liabilities of ₹1.03b due beyond 12 months. Offsetting this, it had ₹3.17b in cash and ₹2.92b in receivables that were due within 12 months. So it actually has ₹4.00b more liquid assets than total liabilities.

This surplus suggests that Balaji Amines has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Balaji Amines has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Balaji Amines's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. 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 ultimately the future profitability of the business will decide if Balaji Amines 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Balaji Amines 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, Balaji Amines recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Balaji Amines has ₹3.02b in net cash and a decent-looking balance sheet. So we don't have any problem with Balaji Amines's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Balaji Amines, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.