E.I.D.- Parry (India) (NSE:EIDPARRY) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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 E.I.D.- Parry (India) Limited (NSE:EIDPARRY) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 ₹10.1b at the end of March 2021, a reduction from ₹50.6b over a year. However, its balance sheet shows it holds ₹10.2b in cash, so it actually has ₹109.9m net cash.

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

We can see from the most recent balance sheet that E.I.D.- Parry (India) had liabilities of ₹57.4b falling due within a year, and liabilities of ₹6.90b due beyond that. Offsetting this, it had ₹10.2b in cash and ₹31.4b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹22.8b.

While this might seem like a lot, it is not so bad since E.I.D.- Parry (India) has a market capitalization of ₹76.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 the other hand, E.I.D.- Parry (India) saw its EBIT drop by 4.5% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 E.I.D.- Parry (India)'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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) 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 E.I.D.- Parry (India)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹109.9m. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in ₹44b. So we are not troubled with E.I.D.- Parry (India)'s debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that E.I.D.- Parry (India) insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.
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