Does Kanoria Chemicals & Industries (NSE:KANORICHEM) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Kanoria Chemicals & Industries Limited (NSE:KANORICHEM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kanoria Chemicals & Industries

What Is Kanoria Chemicals & Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kanoria Chemicals & Industries had ₹4.81b of debt in September 2023, down from ₹5.03b, one year before. However, because it has a cash reserve of ₹109.4m, its net debt is less, at about ₹4.70b.

How Healthy Is Kanoria Chemicals & Industries' Balance Sheet?

We can see from the most recent balance sheet that Kanoria Chemicals & Industries had liabilities of ₹4.94b falling due within a year, and liabilities of ₹3.41b due beyond that. Offsetting this, it had ₹109.4m in cash and ₹1.99b in receivables that were due within 12 months. So it has liabilities totalling ₹6.25b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₹4.85b, we think shareholders really should watch Kanoria Chemicals & Industries's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kanoria Chemicals & Industries'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.

In the last year Kanoria Chemicals & Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 3.2%, to ₹16b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Kanoria Chemicals & Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹194m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₹314m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kanoria Chemicals & Industries is showing 1 warning sign in our investment analysis , 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.