These 4 Measures Indicate That Fertilisers and Chemicals Travancore (NSE:FACT) Is Using Debt Extensively

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, The Fertilisers and Chemicals Travancore Limited (NSE:FACT) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fertilisers and Chemicals Travancore

What Is Fertilisers and Chemicals Travancore's Net Debt?

The chart below, which you can click on for greater detail, shows that Fertilisers and Chemicals Travancore had ₹17.8b in debt in March 2024; about the same as the year before. However, it does have ₹26.8b in cash offsetting this, leading to net cash of ₹9.04b.

How Healthy Is Fertilisers and Chemicals Travancore's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fertilisers and Chemicals Travancore had liabilities of ₹42.4b due within 12 months and liabilities of ₹2.04b due beyond that. Offsetting these obligations, it had cash of ₹26.8b as well as receivables valued at ₹1.58b due within 12 months. So its liabilities total ₹16.0b more than the combination of its cash and short-term receivables.

Of course, Fertilisers and Chemicals Travancore has a market capitalization of ₹701.3b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Fertilisers and Chemicals Travancore also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Fertilisers and Chemicals Travancore's EBIT fell a jaw-dropping 56% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Fertilisers and Chemicals Travancore's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Fertilisers and Chemicals Travancore has ₹9.04b in net cash. So while Fertilisers and Chemicals Travancore does not have a great balance sheet, it's certainly not too bad. 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 example Fertilisers and Chemicals Travancore has 3 warning signs (and 1 which is significant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com