Here's Why Kilitch Drugs (India) (NSE:KILITCH) Can Manage Its Debt Responsibly

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 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 can see that Kilitch Drugs (India) Limited (NSE:KILITCH) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kilitch Drugs (India)

What Is Kilitch Drugs (India)'s Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Kilitch Drugs (India) had debt of ₹287.3m, up from ₹189.4m in one year. However, it does have ₹521.0m in cash offsetting this, leading to net cash of ₹233.7m.

How Strong Is Kilitch Drugs (India)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kilitch Drugs (India) had liabilities of ₹702.6m due within 12 months and liabilities of ₹683.0k due beyond that. Offsetting these obligations, it had cash of ₹521.0m as well as receivables valued at ₹664.1m due within 12 months. So it actually has ₹481.9m more liquid assets than total liabilities.

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

It is well worth noting that Kilitch Drugs (India)'s EBIT shot up like bamboo after rain, gaining 46% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kilitch Drugs (India)'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. While Kilitch Drugs (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, Kilitch Drugs (India) burned a lot of cash. 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 Kilitch Drugs (India) has net cash of ₹233.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 46% year-on-year EBIT growth. So we don't have any problem with Kilitch Drugs (India)'s use of debt. 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 2 warning signs we've spotted with Kilitch Drugs (India) .

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.

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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.