We Think Insecticides (India) (NSE:INSECTICID) Can Stay On Top Of Its Debt

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

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Insecticides (India)

What Is Insecticides (India)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Insecticides (India) had ₹574.2m of debt in September 2020, down from ₹3.05b, one year before. However, it does have ₹863.8m in cash offsetting this, leading to net cash of ₹289.6m.

How Strong Is Insecticides (India)'s Balance Sheet?

The latest balance sheet data shows that Insecticides (India) had liabilities of ₹4.63b due within a year, and liabilities of ₹228.8m falling due after that. Offsetting these obligations, it had cash of ₹863.8m as well as receivables valued at ₹3.44b due within 12 months. So it has liabilities totalling ₹554.4m more than its cash and near-term receivables, combined.

Since publicly traded Insecticides (India) shares are worth a total of ₹9.44b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Insecticides (India) also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Insecticides (India)'s saving grace is its low debt levels, because its EBIT has tanked 40% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Insecticides (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 company can only pay off debt with cold hard cash, not accounting profits. Insecticides (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. During the last three years, Insecticides (India) produced sturdy free cash flow equating to 66% 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 look at a company's total liabilities, it is very reassuring that Insecticides (India) has ₹289.6m in net cash. So we are not troubled with Insecticides (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. For instance, we've identified 2 warning signs for Insecticides (India) that you should be aware of.

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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