These 4 Measures Indicate That Rallis India (NSE:RALLIS) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Rallis India Limited (NSE:RALLIS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Rallis India

What Is Rallis India's Debt?

You can click the graphic below for the historical numbers, but it shows that Rallis India had ₹378.3m of debt in March 2021, down from ₹653.0m, one year before. But on the other hand it also has ₹3.43b in cash, leading to a ₹3.05b net cash position.

How Healthy Is Rallis India's Balance Sheet?

We can see from the most recent balance sheet that Rallis India had liabilities of ₹9.14b falling due within a year, and liabilities of ₹826.6m due beyond that. On the other hand, it had cash of ₹3.43b and ₹4.06b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.48b.

Since publicly traded Rallis India shares are worth a total of ₹60.1b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Rallis India also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Rallis India grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Rallis India can strengthen its balance sheet over time. 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. While Rallis India 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. In the last three years, Rallis India's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Rallis India has ₹3.05b in net cash. And it impressed us with its EBIT growth of 40% over the last year. So is Rallis India's debt a risk? It doesn't seem so to us. We'd be very excited to see if Rallis India insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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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