Here's Why Shree Pushkar Chemicals & Fertilisers (NSE:SHREEPUSHK) Has A Meaningful Debt Burden

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Shree Pushkar Chemicals & Fertilisers Limited (NSE:SHREEPUSHK) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shree Pushkar Chemicals & Fertilisers

What Is Shree Pushkar Chemicals & Fertilisers's Debt?

As you can see below, at the end of March 2024, Shree Pushkar Chemicals & Fertilisers had ₹1.08b of debt, up from ₹679.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹1.10b in cash, so it actually has ₹16.6m net cash.

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

According to the last reported balance sheet, Shree Pushkar Chemicals & Fertilisers had liabilities of ₹1.96b due within 12 months, and liabilities of ₹404.6m due beyond 12 months. On the other hand, it had cash of ₹1.10b and ₹1.59b worth of receivables due within a year. So it actually has ₹327.4m more liquid assets than total liabilities.

This surplus suggests that Shree Pushkar Chemicals & Fertilisers has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shree Pushkar Chemicals & Fertilisers has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Shree Pushkar Chemicals & Fertilisers's saving grace is its low debt levels, because its EBIT has tanked 22% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Shree Pushkar Chemicals & Fertilisers'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 company can only pay off debt with cold hard cash, not accounting profits. While Shree Pushkar Chemicals & Fertilisers 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. Over the last three years, Shree Pushkar Chemicals & Fertilisers recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shree Pushkar Chemicals & Fertilisers has net cash of ₹16.6m, as well as more liquid assets than liabilities. So while Shree Pushkar Chemicals & Fertilisers does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Shree Pushkar Chemicals & Fertilisers .

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.