Bayer CropScience (NSE:BAYERCROP) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Bayer CropScience Limited (NSE:BAYERCROP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bayer CropScience

What Is Bayer CropScience's Net Debt?

The image below, which you can click on for greater detail, shows that Bayer CropScience had debt of ₹638.0m at the end of September 2023, a reduction from ₹831.0m over a year. But on the other hand it also has ₹5.54b in cash, leading to a ₹4.90b net cash position.

How Strong Is Bayer CropScience's Balance Sheet?

The latest balance sheet data shows that Bayer CropScience had liabilities of ₹19.4b due within a year, and liabilities of ₹1.38b falling due after that. On the other hand, it had cash of ₹5.54b and ₹19.9b worth of receivables due within a year. So it can boast ₹4.60b more liquid assets than total liabilities.

This short term liquidity is a sign that Bayer CropScience could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Bayer CropScience boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Bayer CropScience grew its EBIT by 15% last year, making its debt load easier 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Bayer CropScience's free cash flow amounted to 37% of its EBIT, less 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 Bayer CropScience has ₹4.90b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 15% over the last year. So we don't think Bayer CropScience's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Bayer CropScience .

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.