Here's Why TTK Healthcare (NSE:TTKHLTCARE) Can Manage Its Debt Responsibly

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 note that TTK Healthcare Limited (NSE:TTKHLTCARE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for TTK Healthcare

What Is TTK Healthcare's Net Debt?

As you can see below, TTK Healthcare had ₹190.0m of debt at September 2020, down from ₹306.1m a year prior. However, its balance sheet shows it holds ₹2.16b in cash, so it actually has ₹1.97b net cash.

How Strong Is TTK Healthcare's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TTK Healthcare had liabilities of ₹1.81b due within 12 months and liabilities of ₹117.1m due beyond that. Offsetting these obligations, it had cash of ₹2.16b as well as receivables valued at ₹599.3m due within 12 months. So it can boast ₹835.4m more liquid assets than total liabilities.

This short term liquidity is a sign that TTK Healthcare could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, TTK Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact TTK Healthcare's saving grace is its low debt levels, because its EBIT has tanked 55% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is TTK Healthcare's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TTK Healthcare 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. Over the last three years, TTK Healthcare actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that TTK Healthcare has net cash of ₹1.97b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹796m, being 145% of its EBIT. So we don't have any problem with TTK Healthcare's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for TTK Healthcare you should know about.

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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This article by Simply Wall St is general in nature. 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.
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