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.' 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 Seshasayee Paper and Boards Limited (NSE:SESHAPAPER) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Seshasayee Paper and Boards

What Is Seshasayee Paper and Boards's Debt?

As you can see below, Seshasayee Paper and Boards had ₹969.3m of debt at March 2019, down from ₹1.49b a year prior. But on the other hand it also has ₹3.11b in cash, leading to a ₹2.14b net cash position.

How Strong Is Seshasayee Paper and Boards's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Seshasayee Paper and Boards had liabilities of ₹3.32b due within 12 months and liabilities of ₹2.11b due beyond that. Offsetting this, it had ₹3.11b in cash and ₹1.27b in receivables that were due within 12 months. So its liabilities total ₹1.04b more than the combination of its cash and short-term receivables.

Of course, Seshasayee Paper and Boards has a market capitalization of ₹10.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Seshasayee Paper and Boards also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Seshasayee Paper and Boards grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its 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 Seshasayee Paper and Boards can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Seshasayee Paper and Boards 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. During the last three years, Seshasayee Paper and Boards generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Seshasayee Paper and Boards has ₹2.1b in net cash. And it impressed us with free cash flow of ₹2.4b, being 91% of its EBIT. So we don't think Seshasayee Paper and Boards's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Seshasayee Paper and Boards, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.