Here's Why Meghmani Organics (NSE:MOL) Can Afford Some Debt

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 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. We note that Meghmani Organics Limited (NSE:MOL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Meghmani Organics's Net Debt?

As you can see below, Meghmani Organics had ₹7.98b of debt at September 2024, down from ₹8.54b a year prior. However, because it has a cash reserve of ₹327.8m, its net debt is less, at about ₹7.66b.

How Healthy Is Meghmani Organics' Balance Sheet?

The latest balance sheet data shows that Meghmani Organics had liabilities of ₹13.0b due within a year, and liabilities of ₹3.94b falling due after that. Offsetting these obligations, it had cash of ₹327.8m as well as receivables valued at ₹5.51b due within 12 months. So its liabilities total ₹11.1b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹17.1b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Meghmani Organics's earnings that will influence how the balance sheet holds up in the future. 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.

Check out our latest analysis for Meghmani Organics

In the last year Meghmani Organics wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to ₹19b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Meghmani Organics produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₹212m. 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 ₹484m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Meghmani Organics you should be aware of, and 1 of them is concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.