Supreme Petrochem (NSE:SPLPETRO) Has A Pretty Healthy Balance Sheet

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 note that Supreme Petrochem Limited (NSE:SPLPETRO) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Supreme Petrochem Carry?

As you can see below, at the end of September 2024, Supreme Petrochem had ₹1.23b of debt, up from ₹793.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹9.07b in cash, so it actually has ₹7.84b net cash.

A Look At Supreme Petrochem's Liabilities

According to the last reported balance sheet, Supreme Petrochem had liabilities of ₹7.43b due within 12 months, and liabilities of ₹1.51b due beyond 12 months. Offsetting these obligations, it had cash of ₹9.07b as well as receivables valued at ₹3.69b due within 12 months. So it can boast ₹3.82b more liquid assets than total liabilities.

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

View our latest analysis for Supreme Petrochem

Fortunately, Supreme Petrochem grew its EBIT by 7.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Supreme Petrochem can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Supreme Petrochem 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. In the last three years, Supreme Petrochem's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Supreme Petrochem has net cash of ₹7.84b, as well as more liquid assets than liabilities. And it also grew its EBIT by 7.6% over the last year. So we don't have any problem with Supreme Petrochem's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Supreme Petrochem you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.