Here's Why NDR Auto Components (NSE:NDRAUTO) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, NDR Auto Components Limited (NSE:NDRAUTO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for NDR Auto Components

What Is NDR Auto Components's Net Debt?

You can click the graphic below for the historical numbers, but it shows that NDR Auto Components had ₹311.7m of debt in March 2024, down from ₹337.2m, one year before. However, it does have ₹345.2m in cash offsetting this, leading to net cash of ₹33.5m.

How Healthy Is NDR Auto Components' Balance Sheet?

The latest balance sheet data shows that NDR Auto Components had liabilities of ₹1.15b due within a year, and liabilities of ₹274.6m falling due after that. Offsetting this, it had ₹345.2m in cash and ₹944.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹137.3m.

Having regard to NDR Auto Components' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹15.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, NDR Auto Components boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, NDR Auto Components grew its EBIT by 58% 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 you can't view debt in total isolation; since NDR Auto Components will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NDR Auto Components 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, NDR Auto Components burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about NDR Auto Components's liabilities, but we can be reassured by the fact it has has net cash of ₹33.5m. And it impressed us with its EBIT growth of 58% over the last year. So we don't have any problem with NDR Auto Components's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that NDR Auto Components is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.