Sequent Scientific (NSE:SEQUENT) Seems To Use Debt Rather Sparingly

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. We can see that Sequent Scientific Limited (NSE:SEQUENT) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sequent Scientific

What Is Sequent Scientific's Debt?

The image below, which you can click on for greater detail, shows that Sequent Scientific had debt of ₹2.00b at the end of September 2020, a reduction from ₹3.14b over a year. However, its balance sheet shows it holds ₹3.15b in cash, so it actually has ₹1.15b net cash.

A Look At Sequent Scientific's Liabilities

According to the last reported balance sheet, Sequent Scientific had liabilities of ₹6.15b due within 12 months, and liabilities of ₹1.91b due beyond 12 months. Offsetting this, it had ₹3.15b in cash and ₹3.07b in receivables that were due within 12 months. So it has liabilities totalling ₹1.84b more than its cash and near-term receivables, combined.

Since publicly traded Sequent Scientific shares are worth a total of ₹39.6b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sequent Scientific also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Sequent Scientific has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sequent Scientific's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sequent Scientific 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 three years, Sequent Scientific recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sequent Scientific has ₹1.15b in net cash. And we liked the look of last year's 39% year-on-year EBIT growth. So is Sequent Scientific's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for Sequent Scientific that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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