Does Bhageria Industries (NSE:BHAGERIA) Have A Healthy 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.' 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 can see that Bhageria Industries Limited (NSE:BHAGERIA) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for Bhageria Industries

What Is Bhageria Industries's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Bhageria Industries had debt of ₹314.3m, up from ₹206.8m in one year. However, its balance sheet shows it holds ₹622.6m in cash, so it actually has ₹308.3m net cash.

How Healthy Is Bhageria Industries' Balance Sheet?

The latest balance sheet data shows that Bhageria Industries had liabilities of ₹834.9m due within a year, and liabilities of ₹396.5m falling due after that. Offsetting these obligations, it had cash of ₹622.6m as well as receivables valued at ₹975.5m due within 12 months. So it can boast ₹366.7m 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.

The good news is that Bhageria Industries has increased its EBIT by 4.1% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bhageria Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. In the last three years, Bhageria Industries's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bhageria Industries has net cash of ₹308.3m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 4.1% in the last twelve months. So we are not troubled with Bhageria Industries's debt use. 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 - Bhageria Industries has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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