Is Coromandel International (NSE:COROMANDEL) 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.' 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 Coromandel International Limited (NSE:COROMANDEL) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Coromandel International

What Is Coromandel International's Debt?

As you can see below, at the end of September 2024, Coromandel International had ₹5.80b of debt, up from ₹4.36b a year ago. Click the image for more detail. But it also has ₹37.0b in cash to offset that, meaning it has ₹31.2b net cash.

How Healthy Is Coromandel International's Balance Sheet?

The latest balance sheet data shows that Coromandel International had liabilities of ₹61.3b due within a year, and liabilities of ₹6.07b falling due after that. On the other hand, it had cash of ₹37.0b and ₹36.3b worth of receivables due within a year. So it can boast ₹5.88b more liquid assets than total liabilities.

Having regard to Coromandel International's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹517.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Coromandel International boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Coromandel International saw its EBIT decline by 9.3% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Coromandel International'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. Coromandel International 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. Looking at the most recent three years, Coromandel International recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Coromandel International has ₹31.2b in net cash and a decent-looking balance sheet. So we don't have any problem with Coromandel International's use of debt. 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. For example, we've discovered 1 warning sign for Coromandel International that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.