Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) Seems To Use Debt Rather Sparingly

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.' 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 can see that Sree Rayalaseema Hi-Strength Hypo Limited (NSE:SRHHYPOLTD) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sree Rayalaseema Hi-Strength Hypo

What Is Sree Rayalaseema Hi-Strength Hypo's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Sree Rayalaseema Hi-Strength Hypo had debt of ₹713.3m, up from ₹514.0m in one year. But on the other hand it also has ₹1.42b in cash, leading to a ₹702.2m net cash position.

How Healthy Is Sree Rayalaseema Hi-Strength Hypo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sree Rayalaseema Hi-Strength Hypo had liabilities of ₹1.18b due within 12 months and liabilities of ₹125.4m due beyond that. Offsetting this, it had ₹1.42b in cash and ₹973.7m in receivables that were due within 12 months. So it can boast ₹1.08b more liquid assets than total liabilities.

This surplus suggests that Sree Rayalaseema Hi-Strength Hypo is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Sree Rayalaseema Hi-Strength Hypo boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sree Rayalaseema Hi-Strength Hypo has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sree Rayalaseema Hi-Strength Hypo's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sree Rayalaseema Hi-Strength Hypo 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. Over the last three years, Sree Rayalaseema Hi-Strength Hypo recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Sree Rayalaseema Hi-Strength Hypo has ₹702.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹501m, being 92% of its EBIT. The bottom line is that we do not find Sree Rayalaseema Hi-Strength Hypo's debt levels at all concerning. 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. For example - Sree Rayalaseema Hi-Strength Hypo has 3 warning signs we think 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.
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