Is Kanoria Chemicals & Industries (NSE:KANORICHEM) Using Debt Sensibly?

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 Kanoria Chemicals & Industries Limited (NSE:KANORICHEM) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 as of September 2024 Kanoria Chemicals & Industries had ₹5.43b of debt, an increase on ₹4.81b, over one year. However, because it has a cash reserve of ₹164.3m, its net debt is less, at about ₹5.26b.

A Look At Kanoria Chemicals & Industries' Liabilities

We can see from the most recent balance sheet that Kanoria Chemicals & Industries had liabilities of ₹5.56b falling due within a year, and liabilities of ₹3.86b due beyond that. Offsetting these obligations, it had cash of ₹164.3m as well as receivables valued at ₹1.93b due within 12 months. So its liabilities total ₹7.32b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹4.00b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Kanoria Chemicals & Industries would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kanoria Chemicals & Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Kanoria Chemicals & Industries made a loss at the EBIT level, and saw its revenue drop to ₹15b, which is a fall of 6.9%. That's not what we would hope to see.

Caveat Emptor

Importantly, Kanoria Chemicals & Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹249m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₹248m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Kanoria Chemicals & Industries (1 can't be ignored!) that you should be aware of before investing here.

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.

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.