Punjab Chemicals and Crop Protection (NSE: PUNJABCHEM) has a fairly healthy track record
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Punjab Chemicals and Crop Protection Limited (NSE: PUNJABCHEM) carries a debt. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Punjab chemicals and crop protection
What is the debt of Punjab Chemicals and Crop Protection?
The graph below, which you can click for more details, shows that Punjab Chemicals and Crop Protection had a debt of 879.1 million yen as of March 2021; about the same as the year before. However, because he has a cash reserve of 128.2 million yen, his net debt is less, at around 750.9 million yen.
How strong is Punjab Chemicals and Crop Protection’s balance sheet?
We can see from the most recent balance sheet that Punjab Chemicals and Crop Protection had liabilities of 2.13 billion yen maturing within one year and liabilities of 930.6 million yen beyond. On the other hand, he had cash of 128.2 million yen and receivables worth 1.10 billion yen within a year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 1.83b.
Given that the listed Punjab Chemicals and Crop Protection shares are worth a total of 23.3 billion yen, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Punjab Chemicals and Crop Protection’s net debt is only 0.68 times its EBITDA. And its EBIT covers its interest costs 14.6 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Even more impressive was the fact that Punjab Chemicals and Crop Protection increased its EBIT by 201% year over year. This boost will make it even easier to pay down debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Punjab Chemicals and Crop Protection that will influence the balance sheet in the future. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. In the past three years, Punjab Chemicals and Crop Protection has recorded free cash flow of 30% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
Our point of view
The good news is that Punjab Chemicals and Crop Protection’s demonstrated ability to cover interest costs with its BAII delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned about its conversion from EBIT to free cash flow. When zoomed out, Punjab Chemicals and Crop Protection appears to be using debt quite reasonably; and that gets the nod from us. After all, reasonable leverage can increase returns on equity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 2 warning signs for Punjab chemicals and crop protection which you should know before investing here.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash 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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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