E.I.D.- Parry (India) (NSE:EIDPARRY) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that E.I.D.- Parry (India) Limited (NSE:EIDPARRY) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for E.I.D.- Parry (India)

What Is E.I.D.- Parry (India)'s Net Debt?

The image below, which you can click on for greater detail, shows that E.I.D.- Parry (India) had debt of ₹12.1b at the end of March 2023, a reduction from ₹13.2b over a year. However, its balance sheet shows it holds ₹14.5b in cash, so it actually has ₹2.42b net cash.

A Look At E.I.D.- Parry (India)'s Liabilities

The latest balance sheet data shows that E.I.D.- Parry (India) had liabilities of ₹84.7b due within a year, and liabilities of ₹7.69b falling due after that. Offsetting these obligations, it had cash of ₹14.5b as well as receivables valued at ₹39.5b due within 12 months. So its liabilities total ₹38.4b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because E.I.D.- Parry (India) is worth ₹86.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, E.I.D.- Parry (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, E.I.D.- Parry (India) grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if E.I.D.- Parry (India) 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While E.I.D.- Parry (India) 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. Over the last three years, E.I.D.- Parry (India) recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While E.I.D.- Parry (India) does have more liabilities than liquid assets, it also has net cash of ₹2.42b. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in -₹5.0b. So we don't think E.I.D.- Parry (India)'s use of debt is risky. 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 E.I.D.- Parry (India) you should be aware of, and 1 of them is concerning.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.