Does Fine Organic Industries (NSE:FINEORG) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Fine Organic Industries Limited (NSE:FINEORG) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Fine Organic Industries

What Is Fine Organic Industries's Net Debt?

The image below, which you can click on for greater detail, shows that Fine Organic Industries had debt of ₹593.9m at the end of March 2022, a reduction from ₹935.3m over a year. But on the other hand it also has ₹2.33b in cash, leading to a ₹1.73b net cash position.

How Healthy Is Fine Organic Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fine Organic Industries had liabilities of ₹2.51b due within 12 months and liabilities of ₹259.5m due beyond that. On the other hand, it had cash of ₹2.33b and ₹3.08b worth of receivables due within a year. So it can boast ₹2.63b more liquid assets than total liabilities.

Having regard to Fine Organic Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹158.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Fine Organic Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Fine Organic Industries grew its EBIT by 112% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Fine Organic Industries can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Fine Organic Industries 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. Looking at the most recent three years, Fine Organic Industries recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fine Organic Industries has net cash of ₹1.73b, as well as more liquid assets than liabilities. And we liked the look of last year's 112% year-on-year EBIT growth. So is Fine Organic Industries's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Fine Organic Industries (1 doesn't sit too well with us) you should be aware of.

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.