These 4 Measures Indicate That Sumitomo Chemical India (NSE:SUMICHEM) Is Using Debt Safely

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.' 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. We can see that Sumitomo Chemical India Limited (NSE:SUMICHEM) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Sumitomo Chemical India's Net Debt?

As you can see below, at the end of March 2025, Sumitomo Chemical India had ₹518.9m of debt, up from ₹302.5m a year ago. Click the image for more detail. But it also has ₹12.6b in cash to offset that, meaning it has ₹12.1b net cash.

A Look At Sumitomo Chemical India's Liabilities

We can see from the most recent balance sheet that Sumitomo Chemical India had liabilities of ₹9.65b falling due within a year, and liabilities of ₹941.7m due beyond that. Offsetting these obligations, it had cash of ₹12.6b as well as receivables valued at ₹9.43b due within 12 months. So it actually has ₹11.5b more liquid assets than total liabilities.

This short term liquidity is a sign that Sumitomo Chemical India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sumitomo Chemical India has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Sumitomo Chemical India

Another good sign is that Sumitomo Chemical India has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sumitomo Chemical India 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sumitomo Chemical India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Sumitomo Chemical India generated free cash flow amounting to a very robust 88% 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 investigate a company's debt, in this case Sumitomo Chemical India has ₹12.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in ₹4.2b. So we don't think Sumitomo Chemical India's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sumitomo Chemical India's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.