Here's Why E.I.D.- Parry (India) (NSE:EIDPARRY) Can Manage Its Debt Responsibly

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 note that E.I.D.- Parry (India) Limited (NSE:EIDPARRY) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

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

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

As you can see below, E.I.D.- Parry (India) had ₹4.12b of debt at September 2023, down from ₹18.5b a year prior. However, its balance sheet shows it holds ₹36.0b in cash, so it actually has ₹31.9b net cash.

How Strong Is E.I.D.- Parry (India)'s Balance Sheet?

The latest balance sheet data shows that E.I.D.- Parry (India) had liabilities of ₹73.9b due within a year, and liabilities of ₹8.65b falling due after that. Offsetting these obligations, it had cash of ₹36.0b as well as receivables valued at ₹31.7b due within 12 months. So it has liabilities totalling ₹14.9b more than its cash and near-term receivables, combined.

Since publicly traded E.I.D.- Parry (India) shares are worth a total of ₹94.0b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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!

And we also note warmly that E.I.D.- Parry (India) grew its EBIT by 14% last year, making its debt load easier to handle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, E.I.D.- Parry (India) produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While E.I.D.- Parry (India) does have more liabilities than liquid assets, it also has net cash of ₹31.9b. 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. For instance, we've identified 1 warning sign for E.I.D.- Parry (India) that you should be aware of.

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.