Bhageria Industries (NSE:BHAGERIA) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Bhageria Industries Limited (NSE:BHAGERIA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Bhageria Industries

How Much Debt Does Bhageria Industries Carry?

The image below, which you can click on for greater detail, shows that Bhageria Industries had debt of ₹150.5m at the end of September 2020, a reduction from ₹323.1m over a year. However, it does have ₹463.3m in cash offsetting this, leading to net cash of ₹312.8m.

How Strong Is Bhageria Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bhageria Industries had liabilities of ₹557.0m due within 12 months and liabilities of ₹430.1m due beyond that. Offsetting these obligations, it had cash of ₹463.3m as well as receivables valued at ₹776.5m due within 12 months. So it actually has ₹252.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Bhageria Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Bhageria Industries 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 Bhageria Industries saw its EBIT decline by 9.4% 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 Bhageria Industries's earnings that will influence how the balance sheet holds up in the future. 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. Bhageria Industries 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. Looking at the most recent three years, Bhageria Industries recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Bhageria Industries has ₹312.8m in net cash and a decent-looking balance sheet. So we are not troubled with Bhageria Industries's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Bhageria Industries that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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