Is Khaitan Chemicals and Fertilizers (NSE:KHAICHEM) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Khaitan Chemicals and Fertilizers Limited (NSE:KHAICHEM) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Khaitan Chemicals and Fertilizers

What Is Khaitan Chemicals and Fertilizers's Debt?

The image below, which you can click on for greater detail, shows that Khaitan Chemicals and Fertilizers had debt of ₹2.92b at the end of September 2024, a reduction from ₹3.43b over a year. On the flip side, it has ₹81.7m in cash leading to net debt of about ₹2.84b.

A Look At Khaitan Chemicals and Fertilizers' Liabilities

Zooming in on the latest balance sheet data, we can see that Khaitan Chemicals and Fertilizers had liabilities of ₹3.62b due within 12 months and liabilities of ₹536.9m due beyond that. On the other hand, it had cash of ₹81.7m and ₹764.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.31b.

This deficit isn't so bad because Khaitan Chemicals and Fertilizers is worth ₹7.23b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Khaitan Chemicals and Fertilizers'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 Khaitan Chemicals and Fertilizers had a loss before interest and tax, and actually shrunk its revenue by 8.3%, to ₹6.1b. We would much prefer see growth.

Caveat Emptor

Importantly, Khaitan Chemicals and Fertilizers had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹239m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹441m. In the meantime, we consider the stock very 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. We've identified 3 warning signs with Khaitan Chemicals and Fertilizers (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.