Here's Why Bayer CropScience (NSE:BAYERCROP) Can Manage Its Debt Responsibly

Simply Wall St
August 26, 2021
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bayer CropScience

What Is Bayer CropScience's Net Debt?

As you can see below, Bayer CropScience had ₹263.0m of debt at March 2021, down from ₹450.0m a year prior. However, it does have ₹12.6b in cash offsetting this, leading to net cash of ₹12.3b.

NSEI:BAYERCROP Debt to Equity History August 27th 2021

How Strong Is Bayer CropScience's Balance Sheet?

We can see from the most recent balance sheet that Bayer CropScience had liabilities of ₹15.7b falling due within a year, and liabilities of ₹1.18b due beyond that. Offsetting this, it had ₹12.6b in cash and ₹7.64b in receivables that were due within 12 months. So it actually has ₹3.32b 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 ₹237.7b 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 5.8% 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 you can't view debt in total isolation; since Bayer CropScience 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.

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. Happily for any shareholders, Bayer CropScience actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bayer CropScience has net cash of ₹12.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹6.4b, being 102% of its EBIT. So we don't think Bayer CropScience's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Bayer CropScience, you may well want to click here to check an interactive graph of its earnings per share history.

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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