Fine Organic Industries (NSE:FINEORG) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Fine Organic Industries Limited (NSE:FINEORG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fine Organic Industries

What Is Fine Organic Industries's Net Debt?

As you can see below, Fine Organic Industries had ₹449.7m of debt at September 2022, down from ₹788.7m a year prior. But on the other hand it also has ₹2.00b in cash, leading to a ₹1.55b 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 ₹3.35b due within 12 months and liabilities of ₹89.9m due beyond that. On the other hand, it had cash of ₹2.00b and ₹5.11b worth of receivables due within a year. So it can boast ₹3.68b more liquid assets than total liabilities.

This surplus suggests that Fine Organic Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Fine Organic Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Fine Organic Industries grew its EBIT by 275% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fine Organic Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fine Organic Industries 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, Fine Organic Industries created free cash flow amounting to 16% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fine Organic Industries has ₹1.55b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 275% over the last year. So is Fine Organic Industries's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Fine Organic Industries that you should be aware of before investing here.

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.

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

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.