Does Shree Pushkar Chemicals & Fertilisers (NSE:SHREEPUSHK) Have A Healthy 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.' 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. As with many other companies Shree Pushkar Chemicals & Fertilisers Limited (NSE:SHREEPUSHK) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for Shree Pushkar Chemicals & Fertilisers

How Much Debt Does Shree Pushkar Chemicals & Fertilisers Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Shree Pushkar Chemicals & Fertilisers had debt of ₹927.6m, up from ₹572.0m in one year. However, because it has a cash reserve of ₹844.0m, its net debt is less, at about ₹83.6m.

How Strong Is Shree Pushkar Chemicals & Fertilisers' Balance Sheet?

We can see from the most recent balance sheet that Shree Pushkar Chemicals & Fertilisers had liabilities of ₹1.91b falling due within a year, and liabilities of ₹377.7m due beyond that. Offsetting these obligations, it had cash of ₹844.0m as well as receivables valued at ₹949.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹492.4m.

Given Shree Pushkar Chemicals & Fertilisers has a market capitalization of ₹7.44b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Shree Pushkar Chemicals & Fertilisers has virtually no net debt, so it's fair to say it does not have a heavy debt load!

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Shree Pushkar Chemicals & Fertilisers has a low net debt to EBITDA ratio of only 0.10. And its EBIT covers its interest expense a whopping 33.4 times over. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that Shree Pushkar Chemicals & Fertilisers grew its EBIT by 113% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shree Pushkar Chemicals & Fertilisers 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Shree Pushkar Chemicals & Fertilisers created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Shree Pushkar Chemicals & Fertilisers's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Looking at the bigger picture, we think Shree Pushkar Chemicals & Fertilisers's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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 3 warning signs for Shree Pushkar Chemicals & Fertilisers you should be aware of.

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.