We Think Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) Can Manage Its Debt With Ease

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. As with many other companies Sree Rayalaseema Hi-Strength Hypo Limited (NSE:SRHHYPOLTD) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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

How Much Debt Does Sree Rayalaseema Hi-Strength Hypo Carry?

The chart below, which you can click on for greater detail, shows that Sree Rayalaseema Hi-Strength Hypo had ₹305.0m in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds ₹1.18b in cash, so it actually has ₹870.1m net cash.

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

We can see from the most recent balance sheet that Sree Rayalaseema Hi-Strength Hypo had liabilities of ₹720.4m falling due within a year, and liabilities of ₹127.0m due beyond that. Offsetting this, it had ₹1.18b in cash and ₹718.5m in receivables that were due within 12 months. So it actually has ₹1.05b 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. Simply put, the fact that Sree Rayalaseema Hi-Strength Hypo has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Sree Rayalaseema Hi-Strength Hypo has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is Sree Rayalaseema Hi-Strength Hypo'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 88% 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 we empathize with investors who find debt concerning, you should keep in mind that Sree Rayalaseema Hi-Strength Hypo has net cash of ₹870.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in ₹930m. When it comes to Sree Rayalaseema Hi-Strength Hypo's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example, we've discovered 3 warning signs for Sree Rayalaseema Hi-Strength Hypo that you should be aware of before investing here.

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. 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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