Does Fertilisers And Chemicals Travancore (NSE:FACT) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 The Fertilisers And Chemicals Travancore Limited (NSE:FACT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fertilisers And Chemicals Travancore

What Is Fertilisers And Chemicals Travancore's Net Debt?

As you can see below, Fertilisers And Chemicals Travancore had ₹18.1b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹23.2b in cash, so it actually has ₹5.10b net cash.

A Look At Fertilisers And Chemicals Travancore's Liabilities

According to the last reported balance sheet, Fertilisers And Chemicals Travancore had liabilities of ₹39.2b due within 12 months, and liabilities of ₹2.37b due beyond 12 months. On the other hand, it had cash of ₹23.2b and ₹4.79b worth of receivables due within a year. So its liabilities total ₹13.6b more than the combination of its cash and short-term receivables.

Since publicly traded Fertilisers And Chemicals Travancore shares are worth a total of ₹308.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Fertilisers And Chemicals Travancore boasts net cash, so it's fair to say it does not have a heavy debt load!

We note that Fertilisers And Chemicals Travancore grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fertilisers And Chemicals Travancore's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Fertilisers And Chemicals Travancore 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, Fertilisers And Chemicals Travancore generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Fertilisers And Chemicals Travancore's liabilities, but we can be reassured by the fact it has has net cash of ₹5.10b. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in ₹4.6b. So is Fertilisers And Chemicals Travancore'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Fertilisers And Chemicals Travancore you should know about.

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.