Container Corporation of India (NSE:CONCOR) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Container Corporation of India Limited (NSE:CONCOR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Container Corporation of India

What Is Container Corporation of India's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Container Corporation of India had debt of ₹649.9m, up from ₹604.5m in one year. However, its balance sheet shows it holds ₹30.9b in cash, so it actually has ₹30.2b net cash.

A Look At Container Corporation of India's Liabilities

The latest balance sheet data shows that Container Corporation of India had liabilities of ₹11.5b due within a year, and liabilities of ₹7.43b falling due after that. Offsetting this, it had ₹30.9b in cash and ₹1.82b in receivables that were due within 12 months. So it actually has ₹13.8b more liquid assets than total liabilities.

This surplus suggests that Container Corporation of India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Container Corporation of India boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Container Corporation of India grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Container Corporation of India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Container Corporation of 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, Container Corporation of India's free cash flow amounted to 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Container Corporation of India has ₹30.2b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 11% over the last year. So we don't have any problem with Container Corporation of India's use of debt. 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. We've identified 1 warning sign with Container Corporation of India , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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