Does Laxmi Organic Industries (NSE:LXCHEM) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Laxmi Organic Industries Limited (NSE:LXCHEM) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Laxmi Organic Industries

What Is Laxmi Organic Industries's Net Debt?

As you can see below, at the end of September 2024, Laxmi Organic Industries had ₹1.95b of debt, up from ₹1.60b a year ago. Click the image for more detail. But on the other hand it also has ₹3.18b in cash, leading to a ₹1.23b net cash position.

A Look At Laxmi Organic Industries' Liabilities

We can see from the most recent balance sheet that Laxmi Organic Industries had liabilities of ₹8.57b falling due within a year, and liabilities of ₹1.15b due beyond that. Offsetting these obligations, it had cash of ₹3.18b as well as receivables valued at ₹5.67b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹869.2m.

Having regard to Laxmi Organic Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹70.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Laxmi Organic Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Laxmi Organic Industries grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Laxmi Organic Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Laxmi Organic Industries 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, Laxmi Organic Industries saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Laxmi Organic Industries's liabilities, but we can be reassured by the fact it has has net cash of ₹1.23b. And we liked the look of last year's 23% year-on-year EBIT growth. So we are not troubled with Laxmi Organic Industries's debt use. 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. Be aware that Laxmi Organic Industries is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.