Does Chemfab Alkalis (NSE:CHEMFAB) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Chemfab Alkalis Limited (NSE:CHEMFAB) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Chemfab Alkalis

How Much Debt Does Chemfab Alkalis Carry?

The image below, which you can click on for greater detail, shows that Chemfab Alkalis had debt of ₹213.5m at the end of September 2021, a reduction from ₹270.6m over a year. But it also has ₹236.4m in cash to offset that, meaning it has ₹22.9m net cash.

How Strong Is Chemfab Alkalis' Balance Sheet?

According to the last reported balance sheet, Chemfab Alkalis had liabilities of ₹469.7m due within 12 months, and liabilities of ₹112.0m due beyond 12 months. On the other hand, it had cash of ₹236.4m and ₹162.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹183.3m.

Given Chemfab Alkalis has a market capitalization of ₹1.93b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Chemfab Alkalis boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Chemfab Alkalis's EBIT was down 69% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Chemfab Alkalis'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Chemfab Alkalis 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, Chemfab Alkalis's free cash flow amounted to 28% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Chemfab Alkalis has ₹22.9m in net cash. So while Chemfab Alkalis does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 3 warning signs for Chemfab Alkalis you should be aware of, and 1 of them can't be ignored.

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.