INEOS Styrolution India (NSE:INEOSSTYRO) Seems To Use Debt Rather Sparingly

By
Simply Wall St
Published
August 20, 2021
NSEI:INEOSSTYRO
Source: Shutterstock

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 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. Importantly, INEOS Styrolution India Limited (NSE:INEOSSTYRO) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for INEOS Styrolution India

How Much Debt Does INEOS Styrolution India Carry?

As you can see below, INEOS Styrolution India had ₹983.9m of debt at March 2021, down from ₹2.24b a year prior. However, it does have ₹2.43b in cash offsetting this, leading to net cash of ₹1.45b.

debt-equity-history-analysis
NSEI:INEOSSTYRO Debt to Equity History August 21st 2021

How Strong Is INEOS Styrolution India's Balance Sheet?

The latest balance sheet data shows that INEOS Styrolution India had liabilities of ₹3.05b due within a year, and liabilities of ₹1.20b falling due after that. Offsetting these obligations, it had cash of ₹2.43b as well as receivables valued at ₹3.06b due within 12 months. So it can boast ₹1.25b more liquid assets than total liabilities.

This short term liquidity is a sign that INEOS Styrolution India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that INEOS Styrolution India has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, INEOS Styrolution India grew its EBIT by 123,820% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is INEOS Styrolution 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. INEOS Styrolution 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 most recent two years, INEOS Styrolution India recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 INEOS Styrolution India has ₹1.45b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 123,820% over the last year. So we don't think INEOS Styrolution India's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with INEOS Styrolution India .

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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