Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Fine Organic Industries Limited (NSE:FINEORG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fine Organic Industries

What Is Fine Organic Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2019 Fine Organic Industries had ₹1.32b of debt, an increase on ₹536.1m, over one year. On the flip side, it has ₹1.09b in cash leading to net debt of about ₹229.7m.

How Strong Is Fine Organic Industries's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fine Organic Industries had liabilities of ₹1.05b due within 12 months and liabilities of ₹967.3m due beyond that. Offsetting these obligations, it had cash of ₹1.09b as well as receivables valued at ₹1.60b due within 12 months. So it actually has ₹670.8m more liquid assets than total liabilities.

Having regard to Fine Organic Industries's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹52.0b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Fine Organic Industries has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).