We Think Sharda Cropchem (NSE:SHARDACROP) Can Stay On Top Of Its Debt

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. We note that Sharda Cropchem Limited (NSE:SHARDACROP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sharda Cropchem

What Is Sharda Cropchem's Net Debt?

The chart below, which you can click on for greater detail, shows that Sharda Cropchem had ₹400.7m in debt in September 2021; about the same as the year before. But it also has ₹3.99b in cash to offset that, meaning it has ₹3.59b net cash.

How Strong Is Sharda Cropchem's Balance Sheet?

The latest balance sheet data shows that Sharda Cropchem had liabilities of ₹9.15b due within a year, and liabilities of ₹1.14b falling due after that. Offsetting this, it had ₹3.99b in cash and ₹8.26b in receivables that were due within 12 months. So it actually has ₹1.96b more liquid assets than total liabilities.

This short term liquidity is a sign that Sharda Cropchem could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sharda Cropchem boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sharda Cropchem grew its EBIT by 52% 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 it is future earnings, more than anything, that will determine Sharda Cropchem's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sharda Cropchem may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Sharda Cropchem recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sharda Cropchem has net cash of ₹3.59b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 52% over the last year. So is Sharda Cropchem's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Sharda Cropchem , and understanding them should be part of your investment process.

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. 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.