Is Chambal Fertilisers and Chemicals (NSE:CHAMBLFERT) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Chambal Fertilisers and Chemicals Limited (NSE:CHAMBLFERT) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chambal Fertilisers and Chemicals

How Much Debt Does Chambal Fertilisers and Chemicals Carry?

You can click the graphic below for the historical numbers, but it shows that Chambal Fertilisers and Chemicals had ₹18.7b of debt in March 2024, down from ₹33.6b, one year before. However, its balance sheet shows it holds ₹20.5b in cash, so it actually has ₹1.72b net cash.

How Healthy Is Chambal Fertilisers and Chemicals' Balance Sheet?

According to the last reported balance sheet, Chambal Fertilisers and Chemicals had liabilities of ₹20.4b due within 12 months, and liabilities of ₹22.1b due beyond 12 months. Offsetting this, it had ₹20.5b in cash and ₹3.05b in receivables that were due within 12 months. So its liabilities total ₹19.0b more than the combination of its cash and short-term receivables.

Of course, Chambal Fertilisers and Chemicals has a market capitalization of ₹201.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Chambal Fertilisers and Chemicals also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Chambal Fertilisers and Chemicals grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Chambal Fertilisers and Chemicals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Chambal Fertilisers and Chemicals 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. Over the last three years, Chambal Fertilisers and Chemicals actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Chambal Fertilisers and Chemicals's liabilities, but we can be reassured by the fact it has has net cash of ₹1.72b. And it impressed us with free cash flow of ₹27b, being 131% of its EBIT. So we don't think Chambal Fertilisers and Chemicals's use of debt is risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with Chambal Fertilisers and Chemicals .

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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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.