Does Thirumalai Chemicals (NSE:TIRUMALCHM) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Thirumalai Chemicals Limited (NSE:TIRUMALCHM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Thirumalai Chemicals

How Much Debt Does Thirumalai Chemicals Carry?

As you can see below, Thirumalai Chemicals had ₹1.72b of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹5.01b in cash, leading to a ₹3.29b net cash position.

A Look At Thirumalai Chemicals' Liabilities

According to the last reported balance sheet, Thirumalai Chemicals had liabilities of ₹4.41b due within 12 months, and liabilities of ₹2.40b due beyond 12 months. On the other hand, it had cash of ₹5.01b and ₹1.22b worth of receivables due within a year. So its liabilities total ₹579.2m more than the combination of its cash and short-term receivables.

Of course, Thirumalai Chemicals has a market capitalization of ₹27.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Thirumalai Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Thirumalai Chemicals grew its EBIT by 421% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Thirumalai Chemicals'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. Thirumalai Chemicals 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, Thirumalai Chemicals 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

We could understand if investors are concerned about Thirumalai Chemicals's liabilities, but we can be reassured by the fact it has has net cash of ₹3.29b. And it impressed us with free cash flow of ₹3.3b, being 88% of its EBIT. So we don't think Thirumalai Chemicals's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Thirumalai Chemicals .

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.