Is KIOCL (NSE:KIOCL) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies KIOCL Limited (NSE:KIOCL) 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KIOCL

How Much Debt Does KIOCL Carry?

As you can see below, KIOCL had ₹320.7m of debt at September 2024, down from ₹651.1m a year prior. But on the other hand it also has ₹4.82b in cash, leading to a ₹4.50b net cash position.

How Strong Is KIOCL's Balance Sheet?

According to the last reported balance sheet, KIOCL had liabilities of ₹2.67b due within 12 months, and liabilities of ₹2.55b due beyond 12 months. On the other hand, it had cash of ₹4.82b and ₹87.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹311.9m.

Having regard to KIOCL's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹229.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, KIOCL boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is KIOCL'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 KIOCL had a loss before interest and tax, and actually shrunk its revenue by 45%, to ₹11b. To be frank that doesn't bode well.

So How Risky Is KIOCL?

Although KIOCL had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹248m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for KIOCL (1 is a bit unpleasant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.