Does Sumitomo Chemical India (NSE:SUMICHEM) Have A Healthy Balance Sheet?

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. Importantly, Sumitomo Chemical India Limited (NSE:SUMICHEM) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sumitomo Chemical India

What Is Sumitomo Chemical India's Net Debt?

The chart below, which you can click on for greater detail, shows that Sumitomo Chemical India had ₹289.0m in debt in September 2024; about the same as the year before. But it also has ₹13.2b in cash to offset that, meaning it has ₹12.9b net cash.

How Strong Is Sumitomo Chemical India's Balance Sheet?

We can see from the most recent balance sheet that Sumitomo Chemical India had liabilities of ₹10.5b falling due within a year, and liabilities of ₹794.1m due beyond that. Offsetting this, it had ₹13.2b in cash and ₹11.2b in receivables that were due within 12 months. So it can boast ₹13.1b more liquid assets than total liabilities.

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

On top of that, Sumitomo Chemical India grew its EBIT by 65% 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 it is future earnings, more than anything, that will determine Sumitomo Chemical India's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sumitomo Chemical India 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, Sumitomo Chemical India produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sumitomo Chemical India has ₹12.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 65% year-on-year EBIT growth. So we don't think Sumitomo Chemical India's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sumitomo Chemical India's earnings per share history for free.

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.