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

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.' 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. 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?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 ₹17.8b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹26.1b in cash offsetting this, leading to net cash of ₹8.32b.

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

The latest balance sheet data shows that Fertilisers and Chemicals Travancore had liabilities of ₹41.8b due within a year, and liabilities of ₹2.08b falling due after that. Offsetting these obligations, it had cash of ₹26.1b as well as receivables valued at ₹2.88b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹15.0b.

Of course, Fertilisers and Chemicals Travancore has a market capitalization of ₹642.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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!

Shareholders should be aware that Fertilisers and Chemicals Travancore's EBIT was down 95% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Fertilisers and Chemicals Travancore's free cash flow amounted to 27% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 ₹8.32b in net cash. So although we see some areas for improvement, we're not too worried about Fertilisers and Chemicals Travancore's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Fertilisers and Chemicals Travancore , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.