Is Himadri Speciality Chemical (NSE:HSCL) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Himadri Speciality Chemical Limited (NSE:HSCL) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Himadri Speciality Chemical

What Is Himadri Speciality Chemical's Debt?

The image below, which you can click on for greater detail, shows that Himadri Speciality Chemical had debt of ₹3.42b at the end of September 2024, a reduction from ₹10.3b over a year. However, its balance sheet shows it holds ₹5.80b in cash, so it actually has ₹2.38b net cash.

How Strong Is Himadri Speciality Chemical's Balance Sheet?

The latest balance sheet data shows that Himadri Speciality Chemical had liabilities of ₹8.06b due within a year, and liabilities of ₹2.50b falling due after that. Offsetting this, it had ₹5.80b in cash and ₹6.64b in receivables that were due within 12 months. So it can boast ₹1.87b more liquid assets than total liabilities.

Having regard to Himadri Speciality Chemical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹282.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Himadri Speciality Chemical boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Himadri Speciality Chemical grew its EBIT by 47% 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 it is future earnings, more than anything, that will determine Himadri Speciality Chemical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Himadri Speciality Chemical 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, Himadri Speciality Chemical recorded free cash flow of 48% 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 Himadri Speciality Chemical has net cash of ₹2.38b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 47% over the last year. So we don't think Himadri Speciality Chemical's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Himadri Speciality Chemical that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.