These 4 Measures Indicate That Tube Investments of India (NSE:TIINDIA) Is Using Debt Reasonably Well

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, Tube Investments of India Limited (NSE:TIINDIA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tube Investments of India

What Is Tube Investments of India's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Tube Investments of India had debt of ₹28.2b, up from ₹18.8b in one year. But on the other hand it also has ₹31.2b in cash, leading to a ₹3.02b net cash position.

How Strong Is Tube Investments of India's Balance Sheet?

The latest balance sheet data shows that Tube Investments of India had liabilities of ₹49.7b due within a year, and liabilities of ₹27.1b falling due after that. Offsetting these obligations, it had cash of ₹31.2b as well as receivables valued at ₹31.3b due within 12 months. So its liabilities total ₹14.2b more than the combination of its cash and short-term receivables.

Given Tube Investments of India has a market capitalization of ₹638.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Tube Investments of India also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Tube Investments of India saw its EBIT decline by 4.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tube Investments of 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 company can only pay off debt with cold hard cash, not accounting profits. While Tube Investments of India has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Tube Investments of India recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Tube Investments of India's liabilities, but we can be reassured by the fact it has has net cash of ₹3.02b. So we are not troubled with Tube Investments of India's debt use. 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. Case in point: We've spotted 1 warning sign for Tube Investments of India you should be aware of.

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.