Manali Petrochemicals (NSE:MANALIPETC) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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.

Check out our latest analysis for Manali Petrochemicals

What Is Manali Petrochemicals's Net Debt?

As you can see below, at the end of March 2022, Manali Petrochemicals had ₹186.7m of debt, up from ₹142.8m a year ago. Click the image for more detail. But it also has ₹6.17b in cash to offset that, meaning it has ₹5.99b net cash.

How Healthy Is Manali Petrochemicals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Manali Petrochemicals had liabilities of ₹1.85b due within 12 months and liabilities of ₹751.2m due beyond that. Offsetting these obligations, it had cash of ₹6.17b as well as receivables valued at ₹1.60b due within 12 months. So it can boast ₹5.18b more liquid assets than total liabilities.

This surplus strongly suggests that Manali Petrochemicals has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Manali Petrochemicals has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Manali Petrochemicals has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. 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 Manali Petrochemicals 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.

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. During the last three years, Manali Petrochemicals produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Manali Petrochemicals has net cash of ₹5.99b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 80% over the last year. When it comes to Manali Petrochemicals's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Manali Petrochemicals you should be aware of.

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.

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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.