Is Kilitch Drugs (India) (NSE:KILITCH) Weighed On By Its Debt Load?

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 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?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kilitch Drugs (India)

How Much Debt Does Kilitch Drugs (India) Carry?

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 on the other hand it also has ₹327.2m in cash, leading to a ₹188.7m net cash position.

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

We can see from the most recent balance sheet that Kilitch Drugs (India) had liabilities of ₹568.2m falling due within a year, and liabilities of ₹33.4m due beyond that. Offsetting this, it had ₹327.2m in cash and ₹170.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹104.2m.

Given Kilitch Drugs (India) has a market capitalization of ₹1.43b, it's hard to believe these liabilities pose much threat. 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! When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Kilitch Drugs (India) wasn't profitable at an EBIT level, but managed to grow its revenue by 4.5%, to ₹558m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Kilitch Drugs (India)?

While Kilitch Drugs (India) lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₹4.5m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 2 warning signs for Kilitch Drugs (India) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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