These 4 Measures Indicate That Bharat Rasayan (NSE:BHARATRAS) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Bharat Rasayan Limited (NSE:BHARATRAS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bharat Rasayan

How Much Debt Does Bharat Rasayan Carry?

As you can see below, Bharat Rasayan had ₹349.8m of debt at September 2020, down from ₹1.86b a year prior. However, it does have ₹750.9m in cash offsetting this, leading to net cash of ₹401.1m.

How Healthy Is Bharat Rasayan's Balance Sheet?

The latest balance sheet data shows that Bharat Rasayan had liabilities of ₹1.61b due within a year, and liabilities of ₹119.7m falling due after that. On the other hand, it had cash of ₹750.9m and ₹3.35b worth of receivables due within a year. So it can boast ₹2.38b more liquid assets than total liabilities.

This short term liquidity is a sign that Bharat Rasayan could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Bharat Rasayan boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Bharat Rasayan saw its EBIT decline by 6.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bharat Rasayan 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, a company can only pay off debt with cold hard cash, not accounting profits. Bharat Rasayan 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, Bharat Rasayan recorded free cash flow of 46% 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 Bharat Rasayan has net cash of ₹401.1m, as well as more liquid assets than liabilities. So we don't have any problem with Bharat Rasayan's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Bharat Rasayan's earnings per share history for free.

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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