Ador Welding (NSE:ADORWELD) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ador Welding Limited (NSE:ADORWELD) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ador Welding

How Much Debt Does Ador Welding Carry?

As you can see below, at the end of September 2024, Ador Welding had ₹385.5m of debt, up from ₹316.1m a year ago. Click the image for more detail. However, it does have ₹702.4m in cash offsetting this, leading to net cash of ₹316.9m.

How Strong Is Ador Welding's Balance Sheet?

The latest balance sheet data shows that Ador Welding had liabilities of ₹2.02b due within a year, and liabilities of ₹135.8m falling due after that. Offsetting this, it had ₹702.4m in cash and ₹1.62b in receivables that were due within 12 months. So it actually has ₹165.1m more liquid assets than total liabilities.

Having regard to Ador Welding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹21.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Ador Welding has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Ador Welding if management cannot prevent a repeat of the 23% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ador Welding'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ador Welding 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, Ador Welding recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ador Welding has ₹316.9m in net cash and a decent-looking balance sheet. So we are not troubled with Ador Welding's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Ador Welding , 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.