Is E.I.D.- Parry (India) (NSE:EIDPARRY) Using Too Much Debt?

Warren Buffett famously said, '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?

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. 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. 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 think about a company's use of debt, we first look at cash and debt 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 E.I.D.- Parry (India) had debt of ₹8.22b at the end of March 2022, a reduction from ₹13.2b over a year. But it also has ₹18.5b in cash to offset that, meaning it has ₹10.3b 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 ₹71.1b due within a year, and liabilities of ₹7.35b falling due after that. Offsetting these obligations, it had cash of ₹18.5b as well as receivables valued at ₹24.1b due within 12 months. So it has liabilities totalling ₹35.8b more than its cash and near-term receivables, combined.

This deficit isn't so bad because E.I.D.- Parry (India) is worth ₹94.2b, 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. While it does have liabilities worth noting, E.I.D.- Parry (India) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that E.I.D.- Parry (India) grew its EBIT at 13% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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. Happily for any shareholders, E.I.D.- Parry (India) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While E.I.D.- Parry (India) does have more liabilities than liquid assets, it also has net cash of ₹10.3b. The cherry on top was that in converted 141% of that EBIT to free cash flow, bringing in ₹18b. So is E.I.D.- Parry (India)'s debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for E.I.D.- Parry (India) you should be aware of.

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.