We Think Chambal Fertilisers and Chemicals (NSE:CHAMBLFERT) Can Stay On Top Of Its 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 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 Chambal Fertilisers and Chemicals Limited (NSE:CHAMBLFERT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Chambal Fertilisers and Chemicals

How Much Debt Does Chambal Fertilisers and Chemicals Carry?

As you can see below, Chambal Fertilisers and Chemicals had ₹22.8b of debt at September 2023, down from ₹69.2b a year prior. However, it does have ₹43.8b in cash offsetting this, leading to net cash of ₹21.0b.

How Healthy Is Chambal Fertilisers and Chemicals' Balance Sheet?

We can see from the most recent balance sheet that Chambal Fertilisers and Chemicals had liabilities of ₹35.5b falling due within a year, and liabilities of ₹24.2b due beyond that. On the other hand, it had cash of ₹43.8b and ₹8.91b worth of receivables due within a year. So its liabilities total ₹7.04b more than the combination of its cash and short-term receivables.

Given Chambal Fertilisers and Chemicals has a market capitalization of ₹137.0b, 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. Despite its noteworthy liabilities, Chambal Fertilisers and Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Chambal Fertilisers and Chemicals has increased its EBIT by 6.8% over twelve months, which should ease any concerns about debt repayment. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Chambal Fertilisers and Chemicals 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. Happily for any shareholders, Chambal Fertilisers and Chemicals actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 ₹21.0b. The cherry on top was that in converted 197% of that EBIT to free cash flow, bringing in ₹93b. So is Chambal Fertilisers and Chemicals's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Chambal Fertilisers and Chemicals is showing 1 warning sign in our investment analysis , you should know about...

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.