Does Bharat Rasayan (NSE:BHARATRAS) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Bharat Rasayan Limited (NSE:BHARATRAS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bharat Rasayan

How Much Debt Does Bharat Rasayan Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Bharat Rasayan had ₹1.23b of debt, an increase on ₹349.8m, over one year. However, its balance sheet shows it holds ₹3.13b in cash, so it actually has ₹1.90b net cash.

How Healthy Is Bharat Rasayan's Balance Sheet?

According to the last reported balance sheet, Bharat Rasayan had liabilities of ₹2.27b due within 12 months, and liabilities of ₹116.2m due beyond 12 months. Offsetting this, it had ₹3.13b in cash and ₹132.4m in receivables that were due within 12 months. So it can boast ₹881.9m more liquid assets than total liabilities.

Having regard to Bharat Rasayan's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹48.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Bharat Rasayan has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Bharat Rasayan grew its EBIT by 2.7% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bharat Rasayan'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. While Bharat Rasayan 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. In the last three years, Bharat Rasayan's free cash flow amounted to 42% of its EBIT, less 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 Bharat Rasayan has net cash of ₹1.90b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 2.7% in the last twelve months. So we don't have any problem with Bharat Rasayan's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Bharat Rasayan you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.