These 4 Measures Indicate That Kilitch Drugs (India) (NSE:KILITCH) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Kilitch Drugs (India) Limited (NSE:KILITCH) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kilitch Drugs (India)

What Is Kilitch Drugs (India)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Kilitch Drugs (India) had ₹175.7m of debt, an increase on ₹138.5m, over one year. However, it does have ₹487.5m in cash offsetting this, leading to net cash of ₹311.8m.

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 ₹713.2m falling due within a year, and liabilities of ₹3.78m due beyond that. Offsetting this, it had ₹487.5m in cash and ₹222.6m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Kilitch Drugs (India)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹3.02b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Kilitch Drugs (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Kilitch Drugs (India) turned things around in the last 12 months, delivering and EBIT of ₹67m. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the most recent year, Kilitch Drugs (India) recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kilitch Drugs (India) has ₹311.8m in net cash. So is Kilitch Drugs (India)'s debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Kilitch Drugs (India) that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.