These 4 Measures Indicate That Fertilisers And Chemicals Travancore (NSE:FACT) Is Using Debt Reasonably Well

Warren Buffett famously said, '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 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.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Fertilisers And Chemicals Travancore

How Much Debt Does Fertilisers And Chemicals Travancore Carry?

As you can see below, Fertilisers And Chemicals Travancore had ₹18.1b of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹18.8b in cash offsetting this, leading to net cash of ₹712.4m.

How Strong Is Fertilisers And Chemicals Travancore's Balance Sheet?

The latest balance sheet data shows that Fertilisers And Chemicals Travancore had liabilities of ₹38.2b due within a year, and liabilities of ₹2.52b falling due after that. On the other hand, it had cash of ₹18.8b and ₹7.30b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹14.6b.

While this might seem like a lot, it is not so bad since Fertilisers And Chemicals Travancore has a market capitalization of ₹73.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 saw Fertilisers And Chemicals Travancore grow its EBIT by 8.9% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fertilisers And Chemicals Travancore will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Fertilisers And Chemicals Travancore may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Fertilisers And Chemicals Travancore recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although Fertilisers And Chemicals Travancore's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹712.4m. And it impressed us with free cash flow of ₹880m, being 92% of its EBIT. So we are not troubled with Fertilisers And Chemicals Travancore's debt use. 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. We've identified 1 warning sign with Fertilisers And Chemicals Travancore , and understanding them should be part of your investment process.

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.