Here's Why Heubach Colorants India (NSE:HEUBACHIND) Can Manage Its Debt Responsibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Heubach Colorants India Limited (NSE:HEUBACHIND) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Heubach Colorants India

What Is Heubach Colorants India's Net Debt?

As you can see below, at the end of September 2023, Heubach Colorants India had ₹279.3m of debt, up from ₹300.0k a year ago. Click the image for more detail. But it also has ₹301.4m in cash to offset that, meaning it has ₹22.1m net cash.

How Strong Is Heubach Colorants India's Balance Sheet?

According to the last reported balance sheet, Heubach Colorants India had liabilities of ₹2.28b due within 12 months, and liabilities of ₹399.9m due beyond 12 months. Offsetting this, it had ₹301.4m in cash and ₹2.97b in receivables that were due within 12 months. So it actually has ₹593.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Heubach Colorants India could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Heubach Colorants India boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Heubach Colorants India grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Heubach Colorants India will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Heubach Colorants India 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. Over the last three years, Heubach Colorants India reported free cash flow worth 14% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Heubach Colorants India has net cash of ₹22.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 44% over the last year. So we don't think Heubach Colorants India's use of debt is risky. 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. Be aware that Heubach Colorants India is showing 1 warning sign in our investment analysis , 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.