Thirumalai Chemicals (NSE:TIRUMALCHM) Could Easily Take On More Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Thirumalai Chemicals Limited (NSE:TIRUMALCHM) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Thirumalai Chemicals

What Is Thirumalai Chemicals's Debt?

The image below, which you can click on for greater detail, shows that Thirumalai Chemicals had debt of ₹1.83b at the end of March 2021, a reduction from ₹1.97b over a year. However, its balance sheet shows it holds ₹3.25b in cash, so it actually has ₹1.42b net cash.

How Healthy Is Thirumalai Chemicals' Balance Sheet?

The latest balance sheet data shows that Thirumalai Chemicals had liabilities of ₹3.01b due within a year, and liabilities of ₹2.39b falling due after that. Offsetting these obligations, it had cash of ₹3.25b as well as receivables valued at ₹890.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.26b.

Given Thirumalai Chemicals has a market capitalization of ₹15.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Thirumalai Chemicals also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Thirumalai Chemicals grew its EBIT by 335% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Thirumalai Chemicals'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Thirumalai Chemicals 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, Thirumalai Chemicals 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 look at a company's total liabilities, it is very reassuring that Thirumalai Chemicals has ₹1.42b in net cash. And we liked the look of last year's 335% year-on-year EBIT growth. So is Thirumalai Chemicals's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Thirumalai Chemicals (of which 1 makes us a bit uncomfortable!) you should know about.

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.

If you decide to trade Thirumalai Chemicals, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.