E.I.D.- Parry (India) (NSE:EIDPARRY) Has A Pretty 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, E.I.D.- Parry (India) Limited (NSE:EIDPARRY) does carry debt. 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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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

How Much Debt Does E.I.D.- Parry (India) Carry?

The image below, which you can click on for greater detail, shows that at September 2022 E.I.D.- Parry (India) had debt of ₹18.5b, up from ₹13.3b in one year. However, it also had ₹9.53b in cash, and so its net debt is ₹8.97b.

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

According to the last reported balance sheet, E.I.D.- Parry (India) had liabilities of ₹119.9b due within 12 months, and liabilities of ₹7.63b due beyond 12 months. Offsetting these obligations, it had cash of ₹9.53b as well as receivables valued at ₹72.9b due within 12 months. So it has liabilities totalling ₹45.1b more than its cash and near-term receivables, combined.

This deficit isn't so bad because E.I.D.- Parry (India) is worth ₹100.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

E.I.D.- Parry (India)'s net debt is only 0.32 times its EBITDA. And its EBIT covers its interest expense a whopping 35.0 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, E.I.D.- Parry (India) grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, E.I.D.- Parry (India) produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

The good news is that E.I.D.- Parry (India)'s demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its level of total liabilities. Looking at the bigger picture, we think E.I.D.- Parry (India)'s use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that E.I.D.- Parry (India) is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.