BASF India (NSE:BASF) Seems To Use Debt Rather Sparingly

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. Importantly, BASF India Limited (NSE:BASF) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for BASF India

What Is BASF India's Net Debt?

The image below, which you can click on for greater detail, shows that BASF India had debt of ₹1.93b at the end of March 2021, a reduction from ₹6.63b over a year. However, it does have ₹2.13b in cash offsetting this, leading to net cash of ₹201.3m.

How Healthy Is BASF India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BASF India had liabilities of ₹32.0b due within 12 months and liabilities of ₹1.62b due beyond that. Offsetting these obligations, it had cash of ₹2.13b as well as receivables valued at ₹20.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹10.8b.

Given BASF India has a market capitalization of ₹116.7b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, BASF India also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that BASF India grew its EBIT by 191% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BASF India will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While BASF India 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 last three years, BASF India actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about BASF India's liabilities, but we can be reassured by the fact it has has net cash of ₹201.3m. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in ₹4.2b. So is BASF India's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with BASF India .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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