We Think Endurance Technologies (NSE:ENDURANCE) Can Stay On Top Of Its Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Endurance Technologies Limited (NSE:ENDURANCE) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 March 2023 Endurance Technologies had debt of ₹4.83b, up from ₹3.99b in one year. However, its balance sheet shows it holds ₹9.34b in cash, so it actually has ₹4.51b net cash.

How Strong Is Endurance Technologies' Balance Sheet?

The latest balance sheet data shows that Endurance Technologies had liabilities of ₹19.3b due within a year, and liabilities of ₹4.60b falling due after that. On the other hand, it had cash of ₹9.34b and ₹11.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.93b.

Having regard to Endurance Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹208.6b company is short on cash, but still worth keeping an eye on the 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!

Fortunately, Endurance Technologies grew its EBIT by 5.5% in the last year, making that debt load look even more manageable. 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 Endurance Technologies 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 37% 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 ₹4.51b in net cash. And it also grew its EBIT by 5.5% over the last year. So we don't have any problem with Endurance Technologies's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Endurance Technologies .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.