These 4 Measures Indicate That Endurance Technologies (NSE:ENDURANCE) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Endurance Technologies Limited (NSE:ENDURANCE) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Endurance Technologies

How Much Debt Does Endurance Technologies Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Endurance Technologies had debt of ₹6.24b, up from ₹5.07b in one year. However, its balance sheet shows it holds ₹9.35b in cash, so it actually has ₹3.12b net cash.

A Look At Endurance Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Endurance Technologies had liabilities of ₹19.8b due within 12 months and liabilities of ₹4.91b due beyond that. Offsetting these obligations, it had cash of ₹9.35b as well as receivables valued at ₹11.7b due within 12 months. So it has liabilities totalling ₹3.73b more than its cash and near-term receivables, combined.

This state of affairs indicates that Endurance Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹196.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Endurance Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Endurance Technologies if management cannot prevent a repeat of the 25% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Endurance Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Endurance Technologies 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. In the last three years, Endurance Technologies's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Endurance Technologies has ₹3.12b in net cash. So we are not troubled with Endurance Technologies's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Endurance Technologies , and understanding them should be part of your investment process.

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.

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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.