In This Article:
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Shree Pushkar Chemicals & Fertilisers Limited (NSE:SHREEPUSHK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Shree Pushkar Chemicals & Fertilisers
How Much Debt Does Shree Pushkar Chemicals & Fertilisers Carry?
As you can see below, Shree Pushkar Chemicals & Fertilisers had ₹466.7m of debt at March 2019, down from ₹646.4m a year prior. On the flip side, it has ₹398.1m in cash leading to net debt of about ₹68.6m.
How Healthy Is Shree Pushkar Chemicals & Fertilisers's Balance Sheet?
The latest balance sheet data shows that Shree Pushkar Chemicals & Fertilisers had liabilities of ₹959.1m due within a year, and liabilities of ₹279.9m falling due after that. On the other hand, it had cash of ₹398.1m and ₹1.00b worth of receivables due within a year. So it actually has ₹159.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Shree Pushkar Chemicals & Fertilisers could probably pay off its debt with ease, as its balance sheet is far from stretched.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Shree Pushkar Chemicals & Fertilisers's net debt is only 0.12 times its EBITDA. And its EBIT easily covers its interest expense, being 13.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, Shree Pushkar Chemicals & Fertilisers saw its EBIT drop by 9.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shree Pushkar Chemicals & Fertilisers 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.