Bayer CropScience (NSE:BAYERCROP) 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, Bayer CropScience Limited (NSE:BAYERCROP) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bayer CropScience

How Much Debt Does Bayer CropScience Carry?

You can click the graphic below for the historical numbers, but it shows that Bayer CropScience had ₹471.0m of debt in March 2024, down from ₹735.0m, one year before. But on the other hand it also has ₹12.1b in cash, leading to a ₹11.6b net cash position.

How Strong Is Bayer CropScience's Balance Sheet?

According to the last reported balance sheet, Bayer CropScience had liabilities of ₹16.0b due within 12 months, and liabilities of ₹1.50b due beyond 12 months. On the other hand, it had cash of ₹12.1b and ₹9.66b worth of receivables due within a year. So it can boast ₹4.29b more liquid assets than total liabilities.

This state of affairs indicates that Bayer CropScience'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 ₹292.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Bayer CropScience has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Bayer CropScience saw its EBIT decline by 7.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Bayer CropScience'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Bayer CropScience 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, Bayer CropScience recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bayer CropScience has ₹11.6b in net cash and a decent-looking balance sheet. So we are not troubled with Bayer CropScience's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Bayer CropScience has 1 warning sign we think you should be aware of.

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.