These 4 Measures Indicate That Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) Is Using Debt Safely

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 Sree Rayalaseema Hi-Strength Hypo Limited (NSE:SRHHYPOLTD) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Sree Rayalaseema Hi-Strength Hypo

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

You can click the graphic below for the historical numbers, but it shows that Sree Rayalaseema Hi-Strength Hypo had ₹155.1m of debt in September 2022, down from ₹461.2m, one year before. But it also has ₹1.58b in cash to offset that, meaning it has ₹1.42b net cash.

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

According to the last reported balance sheet, Sree Rayalaseema Hi-Strength Hypo had liabilities of ₹1.32b due within 12 months, and liabilities of ₹115.4m due beyond 12 months. Offsetting this, it had ₹1.58b in cash and ₹1.28b in receivables that were due within 12 months. So it actually has ₹1.42b more liquid assets than total liabilities.

It's good to see that Sree Rayalaseema Hi-Strength Hypo has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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!

On top of that, Sree Rayalaseema Hi-Strength Hypo grew its EBIT by 80% 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 you can't view debt in total isolation; since Sree Rayalaseema Hi-Strength Hypo 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. While Sree Rayalaseema Hi-Strength Hypo 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. During the last three years, Sree Rayalaseema Hi-Strength Hypo produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sree Rayalaseema Hi-Strength Hypo has ₹1.42b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 80% over the last year. So we don't think Sree Rayalaseema Hi-Strength Hypo's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Sree Rayalaseema Hi-Strength Hypo 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.