We Think India Pesticides (NSE:IPL) Is Taking Some Risk With 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. As with many other companies India Pesticides Limited (NSE:IPL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for India Pesticides

What Is India Pesticides's Debt?

The chart below, which you can click on for greater detail, shows that India Pesticides had ₹156.2m in debt in September 2023; about the same as the year before. However, it does have ₹560.1m in cash offsetting this, leading to net cash of ₹403.9m.

A Look At India Pesticides' Liabilities

We can see from the most recent balance sheet that India Pesticides had liabilities of ₹1.55b falling due within a year, and liabilities of ₹239.1m due beyond that. Offsetting these obligations, it had cash of ₹560.1m as well as receivables valued at ₹2.77b due within 12 months. So it can boast ₹1.55b more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for India Pesticides if management cannot prevent a repeat of the 40% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if India Pesticides can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. India Pesticides 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 last three years, India Pesticides recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that India Pesticides has net cash of ₹403.9m, as well as more liquid assets than liabilities. So while India Pesticides does not have a great balance sheet, it's certainly not too bad. 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 India Pesticides that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.