Here's Why Bhageria Industries (NSE:BHAGERIA) Can Manage Its Debt Responsibly

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.' 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. We note that Bhageria Industries Limited (NSE:BHAGERIA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Bhageria Industries

What Is Bhageria Industries's Debt?

The image below, which you can click on for greater detail, shows that Bhageria Industries had debt of ₹232.3m at the end of September 2022, a reduction from ₹452.2m over a year. But on the other hand it also has ₹368.3m in cash, leading to a ₹136.0m net cash position.

How Healthy Is Bhageria Industries' Balance Sheet?

According to the last reported balance sheet, Bhageria Industries had liabilities of ₹955.3m due within 12 months, and liabilities of ₹415.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹368.3m as well as receivables valued at ₹1.30b due within 12 months. So it can boast ₹296.2m 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. Succinctly put, Bhageria Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Bhageria Industries's saving grace is its low debt levels, because its EBIT has tanked 61% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bhageria Industries'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Bhageria Industries 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. Looking at the most recent three years, Bhageria Industries recorded free cash flow of 36% of its EBIT, which is weaker 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 ₹136.0m, as well as more liquid assets than liabilities. So we are not troubled with Bhageria Industries's debt use. 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. To that end, you should learn about the 4 warning signs we've spotted with Bhageria Industries (including 1 which is concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.