Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We notice that IFB Industries Limited (NSE:IFBIND) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
Discover our latest analysis for IFB Industries
What is IFB Industries’ net debt?
The image below, which you can click on for more details, shows that IFB Industries had debt of ₹2.47 billion at the end of September 2021, a reduction from ₹2.80 billion year on year . But on the other hand, it also has ₹3.34 billion in cash, resulting in a net cash position of ₹869.6 million.
How healthy is IFB Industries’ balance sheet?
We can see from the most recent balance sheet that IFB Industries had liabilities of ₹11.3 billion due within a year, and liabilities of ₹3.47 billion due beyond. As compensation for these obligations, it had cash of ₹3.34 billion as well as receivables valued at ₹3.38 billion due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by ₹8.04 billion.
Considering that IFB Industries has a market capitalization of ₹42.0 billion, it is hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. Despite significant liabilities, IFB Industries has net cash, so it is fair to say that it is not heavily indebted!
We also note that IFB Industries improved its EBIT from last year’s loss to a positive result of ₹918 million. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since IFB Industries will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. IFB Industries may have net cash on the balance sheet, but it’s always interesting to look at the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its capacity. to manage debt. Over the past year, IFB Industries has experienced substantial negative free cash flow, overall. While this may be the result of spending for growth, it makes debt much riskier.
Although IFB Industries’ balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of ₹869.6 million. So even though IFB Industries doesn’t have a great track record, it’s certainly not that bad. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 2 warning signs we spotted with IFB Industries (including 1 that makes us a little uncomfortable).
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.