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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Kilitch Drugs (India) Limited (NSE:KILITCH) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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)

What Is Kilitch Drugs (India)'s Debt?

As you can see below, at the end of March 2023, Kilitch Drugs (India) had ₹221.9m of debt, up from ₹204.3m a year ago. Click the image for more detail. But on the other hand it also has ₹591.8m in cash, leading to a ₹369.8m net cash position.

A Look At Kilitch Drugs (India)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Kilitch Drugs (India) had liabilities of ₹688.7m due within 12 months and liabilities of ₹683.0k due beyond that. Offsetting these obligations, it had cash of ₹591.8m as well as receivables valued at ₹543.1m due within 12 months. So it actually has ₹445.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Kilitch Drugs (India) could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Kilitch Drugs (India) has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Kilitch Drugs (India) grew its EBIT by 67% 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Kilitch Drugs (India)'s free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kilitch Drugs (India) has net cash of ₹369.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 67% year-on-year EBIT growth. So we don't think Kilitch Drugs (India)'s use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Kilitch Drugs (India) has 2 warning signs we think you should be aware of.

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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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.