Sumitomo Chemical India (NSE:SUMICHEM) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sumitomo Chemical India

What Is Sumitomo Chemical India's Net Debt?

The image below, which you can click on for greater detail, shows that Sumitomo Chemical India had debt of ₹339.7m at the end of March 2023, a reduction from ₹375.8m over a year. However, it does have ₹7.99b in cash offsetting this, leading to net cash of ₹7.66b.

A Look At Sumitomo Chemical India's Liabilities

According to the last reported balance sheet, Sumitomo Chemical India had liabilities of ₹9.33b due within 12 months, and liabilities of ₹539.3m due beyond 12 months. On the other hand, it had cash of ₹7.99b and ₹9.73b worth of receivables due within a year. So it actually has ₹7.85b more liquid assets than total liabilities.

This surplus suggests that Sumitomo Chemical India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sumitomo Chemical India boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Sumitomo Chemical India has seen its EBIT plunge 15% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sumitomo Chemical India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Sumitomo Chemical India recorded free cash flow of 39% of its EBIT, which is weaker 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 Sumitomo Chemical India has net cash of ₹7.66b, as well as more liquid assets than liabilities. So we are not troubled with Sumitomo Chemical India's debt use. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.