Stock Analysis

Does Bayer CropScience (NSE:BAYERCROP) Have A Healthy Balance Sheet?

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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.' 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. As with many other companies Bayer CropScience Limited (NSE:BAYERCROP) makes use of 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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Bayer CropScience's Net Debt?

As you can see below, at the end of September 2022, Bayer CropScience had ₹831.0m of debt, up from ₹315.0m a year ago. Click the image for more detail. But on the other hand it also has ₹6.20b in cash, leading to a ₹5.37b net cash position.

NSEI:BAYERCROP Debt to Equity History March 17th 2023

A Look At Bayer CropScience's Liabilities

Zooming in on the latest balance sheet data, we can see that Bayer CropScience had liabilities of ₹16.1b due within 12 months and liabilities of ₹1.42b due beyond that. Offsetting this, it had ₹6.20b in cash and ₹16.0b in receivables that were due within 12 months. So it actually has ₹4.70b more liquid assets than total liabilities.

This surplus suggests that Bayer CropScience has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Bayer CropScience boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Bayer CropScience has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Bayer CropScience's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Bayer CropScience 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 most recent three years, Bayer CropScience recorded free cash flow worth 59% 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

While we empathize with investors who find debt concerning, you should keep in mind that Bayer CropScience has net cash of ₹5.37b, as well as more liquid assets than liabilities. And we liked the look of last year's 35% year-on-year EBIT growth. So is Bayer CropScience'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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Bayer CropScience that you should be aware of before investing here.

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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