Fertilisers and Chemicals Travancore (NSE:FACT) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that The Fertilisers and Chemicals Travancore Limited (NSE:FACT) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Fertilisers and Chemicals Travancore Carry?

As you can see below, at the end of September 2025, Fertilisers and Chemicals Travancore had ₹38.0b of debt, up from ₹17.8b a year ago. Click the image for more detail. However, it does have ₹22.2b in cash offsetting this, leading to net debt of about ₹15.8b.

A Look At Fertilisers and Chemicals Travancore's Liabilities

We can see from the most recent balance sheet that Fertilisers and Chemicals Travancore had liabilities of ₹51.3b falling due within a year, and liabilities of ₹1.76b due beyond that. Offsetting this, it had ₹22.2b in cash and ₹5.61b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹25.2b.

Since publicly traded Fertilisers and Chemicals Travancore shares are worth a total of ₹584.5b, 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.

View our latest analysis for Fertilisers and Chemicals Travancore

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Fertilisers and Chemicals Travancore has a rather high debt to EBITDA ratio of 8.5 which suggests a meaningful debt load. However, its interest coverage of 3.3 is reasonably strong, which is a good sign. The silver lining is that Fertilisers and Chemicals Travancore grew its EBIT by 416% last year, which nourishing like the idealism of youth. If that earnings trend continues it will make its debt load much more manageable in the future. 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, 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. Over the most recent three years, Fertilisers and Chemicals Travancore recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Fertilisers and Chemicals Travancore's impressive EBIT growth rate implies it has the upper hand on its debt. But the stark truth is that we are concerned by its net debt to EBITDA. Taking all this data into account, it seems to us that Fertilisers and Chemicals Travancore takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. 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. Be aware that Fertilisers and Chemicals Travancore is showing 2 warning signs in our investment analysis , you should know about...

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.