IOL Chemicals and Pharmaceuticals (NSE:IOLCP) Has A Somewhat Strained 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that IOL Chemicals and Pharmaceuticals Limited (NSE:IOLCP) does use debt in its business. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for IOL Chemicals and Pharmaceuticals

How Much Debt Does IOL Chemicals and Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 IOL Chemicals and Pharmaceuticals had ₹1.28b of debt, an increase on ₹590.5m, over one year. However, it does have ₹1.54b in cash offsetting this, leading to net cash of ₹256.2m.

How Healthy Is IOL Chemicals and Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that IOL Chemicals and Pharmaceuticals had liabilities of ₹5.30b due within a year, and liabilities of ₹760.8m falling due after that. On the other hand, it had cash of ₹1.54b and ₹4.74b worth of receivables due within a year. So it actually has ₹223.7m more liquid assets than total liabilities.

Having regard to IOL Chemicals and Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹20.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that IOL Chemicals and Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that IOL Chemicals and Pharmaceuticals's load is not too heavy, because its EBIT was down 46% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if IOL Chemicals and Pharmaceuticals 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While IOL Chemicals and Pharmaceuticals 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. Over the last three years, IOL Chemicals and Pharmaceuticals saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that IOL Chemicals and Pharmaceuticals has net cash of ₹256.2m, as well as more liquid assets than liabilities. So while IOL Chemicals and Pharmaceuticals does not have a great balance sheet, it's certainly not too bad. 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 2 warning signs for IOL Chemicals and Pharmaceuticals you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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

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.