Is TTK Healthcare (NSE:TTKHLTCARE) A Risky Investment?

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 TTK Healthcare Limited (NSE:TTKHLTCARE) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TTK Healthcare

How Much Debt Does TTK Healthcare Carry?

You can click the graphic below for the historical numbers, but it shows that TTK Healthcare had ₹190.0m of debt in September 2020, down from ₹299.7m, one year before. However, it does have ₹2.16b in cash offsetting this, leading to net cash of ₹1.97b.

How Strong Is TTK Healthcare's Balance Sheet?

The latest balance sheet data shows that TTK Healthcare had liabilities of ₹1.81b due within a year, and liabilities of ₹117.1m falling due after that. Offsetting this, it had ₹2.16b in cash and ₹599.3m in receivables that were due within 12 months. So it can boast ₹835.4m more liquid assets than total liabilities.

This surplus suggests that TTK Healthcare has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 74% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is TTK Healthcare'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While TTK Healthcare 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 last three years, TTK Healthcare actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case TTK Healthcare has ₹1.97b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in ₹796m. So we are not troubled with TTK Healthcare's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - TTK Healthcare has 4 warning signs (and 1 which is significant) we think you should know about.

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. 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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