Is Heubach Colorants India (NSE:HEUBACHIND) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Heubach Colorants India Limited (NSE:HEUBACHIND) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Heubach Colorants India

What Is Heubach Colorants India's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Heubach Colorants India had debt of ₹270.2m, up from none in one year. However, it does have ₹1.13b in cash offsetting this, leading to net cash of ₹862.6m.

A Look At Heubach Colorants India's Liabilities

Zooming in on the latest balance sheet data, we can see that Heubach Colorants India had liabilities of ₹2.15b due within 12 months and liabilities of ₹381.8m due beyond that. Offsetting this, it had ₹1.13b in cash and ₹1.99b in receivables that were due within 12 months. So it can boast ₹590.9m more liquid assets than total liabilities.

This surplus suggests that Heubach Colorants India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Heubach Colorants India boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Heubach Colorants India's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Heubach Colorants India'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Heubach Colorants India 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. During the last three years, Heubach Colorants India produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Heubach Colorants India has ₹862.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in ₹780m. So we are not troubled with Heubach Colorants India's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Heubach Colorants India you should know about.

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.