Is Kilitch Drugs (India) (NSE:KILITCH) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Kilitch Drugs (India) Limited (NSE:KILITCH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Kilitch Drugs (India)

What Is Kilitch Drugs (India)'s Debt?

As you can see below, Kilitch Drugs (India) had ₹138.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₹327.2m in cash to offset that, meaning it has ₹188.7m net cash.

A Look At Kilitch Drugs (India)'s Liabilities

According to the last reported balance sheet, Kilitch Drugs (India) had liabilities of ₹568.2m due within 12 months, and liabilities of ₹33.4m due beyond 12 months. Offsetting this, it had ₹327.2m in cash and ₹170.1m in receivables that were due within 12 months. So its liabilities total ₹104.2m more than the combination of its cash and short-term receivables.

Of course, Kilitch Drugs (India) has a market capitalization of ₹1.33b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Kilitch Drugs (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Kilitch Drugs (India)'s EBIT fell a jaw-dropping 71% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kilitch Drugs (India) will need earnings to service that debt. 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. Kilitch Drugs (India) 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, Kilitch Drugs (India) saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about Kilitch Drugs (India)'s liabilities, but we can be reassured by the fact it has has net cash of ₹188.7m. Despite its cash we think that Kilitch Drugs (India) seems to struggle to grow its EBIT, so we are wary of the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Kilitch Drugs (India) that you should be aware of before investing here.

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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