Is BASF India (NSE:BASF) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that BASF India Limited (NSE:BASF) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for BASF India

How Much Debt Does BASF India Carry?

The image below, which you can click on for greater detail, shows that at September 2023 BASF India had debt of ₹1.23b, up from ₹1.05b in one year. However, its balance sheet shows it holds ₹5.35b in cash, so it actually has ₹4.12b net cash.

How Strong Is BASF India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BASF India had liabilities of ₹32.1b due within 12 months and liabilities of ₹1.53b due beyond that. On the other hand, it had cash of ₹5.35b and ₹26.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.02b.

This state of affairs indicates that BASF India's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹144.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Fortunately, BASF India grew its EBIT by 3.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BASF India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. BASF India 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. Over the most recent three years, BASF India recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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 ₹4.12b. So we don't think BASF India'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 BASF India's earnings per share history for free.

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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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.