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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Bhageria Industries Limited (NSE:BHAGIL) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Bhageria Industries's Debt?
You can click the graphic below for the historical numbers, but it shows that Bhageria Industries had ₹234.9m of debt in March 2019, down from ₹835.1m, one year before. But on the other hand it also has ₹497.1m in cash, leading to a ₹262.2m net cash position.
How Strong Is Bhageria Industries's Balance Sheet?
According to the last reported balance sheet, Bhageria Industries had liabilities of ₹734.0m due within 12 months, and liabilities of ₹513.3m due beyond 12 months. Offsetting this, it had ₹497.1m in cash and ₹676.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹74.2m.
Having regard to Bhageria Industries's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹4.83b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Bhageria Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Bhageria Industries grew its EBIT by 32% 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 ultimately the future profitability of the business will decide if Bhageria Industries 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. While Bhageria Industries 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. In the last three years, Bhageria Industries's free cash flow amounted to 28% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
We could understand if investors are concerned about Bhageria Industries's liabilities, but we can be reassured by the fact it has has net cash of ₹262.2m. And it impressed us with its EBIT growth of 32% over the last year. So we don't think Bhageria Industries's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Bhageria Industries insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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