Kilitch Drugs (India) (NSE:KILITCH) Could Easily Take On More Debt

Warren Buffett famously said, '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. Importantly, Kilitch Drugs (India) Limited (NSE:KILITCH) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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. 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?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Kilitch Drugs (India) had ₹204.3m of debt, an increase on ₹148.0m, over one year. But on the other hand it also has ₹573.0m in cash, leading to a ₹368.6m net cash position.

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

According to the last reported balance sheet, Kilitch Drugs (India) had liabilities of ₹692.8m due within 12 months, and liabilities of ₹2.75m due beyond 12 months. Offsetting these obligations, it had cash of ₹573.0m as well as receivables valued at ₹414.3m due within 12 months. So it can boast ₹291.7m 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!

On top of that, Kilitch Drugs (India) grew its EBIT by 91% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 two years, Kilitch Drugs (India) produced sturdy free cash flow equating to 58% 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 we empathize with investors who find debt concerning, you should keep in mind that Kilitch Drugs (India) has net cash of ₹368.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 91% year-on-year EBIT growth. So we don't think Kilitch Drugs (India)'s use of debt is risky. 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. We've identified 2 warning signs with Kilitch Drugs (India) , and understanding them should be part of your investment process.

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.