Bhageria Industries (NSE:BHAGERIA) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Bhageria Industries Limited (NSE:BHAGERIA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Bhageria Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Bhageria Industries had ₹257.0m of debt, an increase on ₹55.9m, over one year. But on the other hand it also has ₹814.2m in cash, leading to a ₹557.2m net cash position.

A Look At Bhageria Industries' Liabilities

We can see from the most recent balance sheet that Bhageria Industries had liabilities of ₹907.1m falling due within a year, and liabilities of ₹448.6m due beyond that. Offsetting this, it had ₹814.2m in cash and ₹1.24b in receivables that were due within 12 months. So it can boast ₹698.3m more liquid assets than total liabilities.

This surplus suggests that Bhageria Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Bhageria Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Bhageria Industries

Even more impressive was the fact that Bhageria Industries grew its EBIT by 176% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bhageria Industries has net cash of ₹557.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 176% over the last year. So we don't think Bhageria Industries'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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Bhageria Industries (of which 1 is a bit concerning!) you should know about.

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. 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.