Here's Why Fine Organic Industries (NSE:FINEORG) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Fine Organic Industries Limited (NSE:FINEORG) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Debt?

As you can see below, Fine Organic Industries had ₹611.0m of debt at March 2021, down from ₹1.32b a year prior. However, its balance sheet shows it holds ₹2.64b in cash, so it actually has ₹2.03b net cash.

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 ₹1.54b due within 12 months and liabilities of ₹611.0m due beyond that. On the other hand, it had cash of ₹2.64b and ₹1.66b worth of receivables due within a year. So it can boast ₹2.15b 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.

On the other hand, Fine Organic Industries's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 42% 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 ₹2.03b, as well as more liquid assets than liabilities. So we are not troubled with Fine Organic Industries's debt use. 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 2 warning signs with Fine Organic Industries , and understanding them should be part of your investment process.

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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