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 note that Bharat Rasayan Limited (NSE:BHARATRAS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Bharat Rasayan

What Is Bharat Rasayan's Debt?

You can click the graphic below for the historical numbers, but it shows that Bharat Rasayan had ₹584.5m of debt in March 2021, down from ₹938.6m, one year before. But on the other hand it also has ₹1.39b in cash, leading to a ₹806.8m net cash position.

A Look At Bharat Rasayan's Liabilities

We can see from the most recent balance sheet that Bharat Rasayan had liabilities of ₹1.70b falling due within a year, and liabilities of ₹102.7m due beyond that. Offsetting these obligations, it had cash of ₹1.39b as well as receivables valued at ₹2.99b due within 12 months. So it actually has ₹2.57b more liquid assets than total liabilities.

This surplus suggests that Bharat Rasayan has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Bharat Rasayan boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Bharat Rasayan grew its EBIT by 6.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 41% 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 ₹806.8m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 6.4% in the last twelve months. So we are not troubled with Bharat Rasayan's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Bharat Rasayan .

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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