These 4 Measures Indicate That Chambal Fertilisers and Chemicals (NSE:CHAMBLFERT) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Chambal Fertilisers and Chemicals Limited (NSE:CHAMBLFERT) 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 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.

View our latest analysis for Chambal Fertilisers and Chemicals

What Is Chambal Fertilisers and Chemicals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Chambal Fertilisers and Chemicals had ₹18.5b of debt in March 2024, down from ₹33.4b, one year before. However, it does have ₹20.7b in cash offsetting this, leading to net cash of ₹2.12b.

How Strong Is Chambal Fertilisers and Chemicals' Balance Sheet?

We can see from the most recent balance sheet that Chambal Fertilisers and Chemicals had liabilities of ₹20.4b falling due within a year, and liabilities of ₹22.1b due beyond that. On the other hand, it had cash of ₹20.7b and ₹1.92b worth of receivables due within a year. So it has liabilities totalling ₹19.9b more than its cash and near-term receivables, combined.

Given Chambal Fertilisers and Chemicals has a market capitalization of ₹141.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

The good news is that Chambal Fertilisers and Chemicals has increased its EBIT by 8.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Chambal Fertilisers and Chemicals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Chambal Fertilisers and Chemicals's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹2.12b. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in ₹27b. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Chambal Fertilisers and Chemicals that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.