Does Subros (NSE:SUBROS) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Subros Limited (NSE:SUBROS) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Subros

What Is Subros's Debt?

As you can see below, Subros had ₹307.7m of debt at September 2021, down from ₹1.16b a year prior. But on the other hand it also has ₹928.7m in cash, leading to a ₹621.0m net cash position.

How Strong Is Subros' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Subros had liabilities of ₹5.40b due within 12 months and liabilities of ₹588.2m due beyond that. Offsetting these obligations, it had cash of ₹928.7m as well as receivables valued at ₹1.50b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.56b.

Since publicly traded Subros shares are worth a total of ₹26.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Subros also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Subros grew its EBIT by 222% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Subros will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Subros 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, Subros generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

Although Subros's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹621.0m. And it impressed us with free cash flow of ₹1.2b, being 81% of its EBIT. So we don't think Subros'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 Subros's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.