Is Manali Petrochemicals (NSE:MANALIPETC) A Risky Investment?

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.' 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. Importantly, Manali Petrochemicals Limited (NSE:MANALIPETC) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Manali Petrochemicals

What Is Manali Petrochemicals's Debt?

As you can see below, Manali Petrochemicals had ₹118.8m of debt at March 2021, down from ₹256.5m a year prior. However, it does have ₹2.87b in cash offsetting this, leading to net cash of ₹2.75b.

How Strong Is Manali Petrochemicals' Balance Sheet?

According to the last reported balance sheet, Manali Petrochemicals had liabilities of ₹1.64b due within 12 months, and liabilities of ₹427.8m due beyond 12 months. On the other hand, it had cash of ₹2.87b and ₹1.73b worth of receivables due within a year. So it actually has ₹2.54b more liquid assets than total liabilities.

It's good to see that Manali Petrochemicals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Manali Petrochemicals has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Manali Petrochemicals grew its EBIT by 396% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Manali Petrochemicals will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Manali Petrochemicals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Manali Petrochemicals recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Manali Petrochemicals has net cash of ₹2.75b, as well as more liquid assets than liabilities. And we liked the look of last year's 396% year-on-year EBIT growth. So is Manali Petrochemicals's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Manali Petrochemicals, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.
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