Does Himadri Speciality Chemical (NSE:HSCL) 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.' 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 Himadri Speciality Chemical Limited (NSE:HSCL) does use debt in its business. But the real question is whether this debt is making the company risky.

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

Check out our latest analysis for Himadri Speciality Chemical

How Much Debt Does Himadri Speciality Chemical Carry?

The image below, which you can click on for greater detail, shows that Himadri Speciality Chemical had debt of ₹6.05b at the end of March 2024, a reduction from ₹8.42b over a year. However, it does have ₹2.21b in cash offsetting this, leading to net debt of about ₹3.84b.

How Healthy Is Himadri Speciality Chemical's Balance Sheet?

The latest balance sheet data shows that Himadri Speciality Chemical had liabilities of ₹12.0b due within a year, and liabilities of ₹2.03b falling due after that. Offsetting this, it had ₹2.21b in cash and ₹6.79b in receivables that were due within 12 months. So it has liabilities totalling ₹5.06b more than its cash and near-term receivables, combined.

This state of affairs indicates that Himadri Speciality Chemical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹278.5b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Himadri Speciality Chemical has virtually no net debt, so it's fair to say it does not have a heavy debt load!

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Himadri Speciality Chemical's net debt is only 0.56 times its EBITDA. And its EBIT covers its interest expense a whopping 30.0 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Himadri Speciality Chemical grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Himadri Speciality Chemical 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Himadri Speciality Chemical's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Himadri Speciality Chemical's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Looking at the bigger picture, we think Himadri Speciality Chemical's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Himadri Speciality Chemical you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.