Stock Analysis

Oriental Aromatics (NSE:OAL) Seems To Use Debt Rather Sparingly

NSEI:OAL
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Oriental Aromatics Limited (NSE:OAL) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Oriental Aromatics

How Much Debt Does Oriental Aromatics Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Oriental Aromatics had debt of ₹787.0m, up from ₹446.4m in one year. However, it also had ₹182.5m in cash, and so its net debt is ₹604.5m.

debt-equity-history-analysis
NSEI:OAL Debt to Equity History September 3rd 2021

How Healthy Is Oriental Aromatics' Balance Sheet?

We can see from the most recent balance sheet that Oriental Aromatics had liabilities of ₹1.58b falling due within a year, and liabilities of ₹293.2m due beyond that. Offsetting this, it had ₹182.5m in cash and ₹1.90b in receivables that were due within 12 months. So it actually has ₹205.6m more liquid assets than total liabilities.

Having regard to Oriental Aromatics' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹31.2b company is struggling for cash, we still think it's worth monitoring its balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Oriental Aromatics has a low net debt to EBITDA ratio of only 0.35. And its EBIT covers its interest expense a whopping 128 times over. So we're pretty relaxed about its super-conservative use of debt. On top of that, Oriental Aromatics grew its EBIT by 73% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Oriental Aromatics'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Oriental Aromatics recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Oriental Aromatics's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Zooming out, Oriental Aromatics seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Oriental Aromatics's earnings per share history for free.

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.
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