Does Ador Welding (NSE:ADORWELD) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Ador Welding Limited (NSE:ADORWELD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 Ador Welding

What Is Ador Welding's Debt?

As you can see below, Ador Welding had ₹206.1m of debt at September 2022, down from ₹323.5m a year prior. But it also has ₹208.2m in cash to offset that, meaning it has ₹2.10m net cash.

How Healthy Is Ador Welding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ador Welding had liabilities of ₹1.17b due within 12 months and liabilities of ₹76.7m due beyond that. Offsetting these obligations, it had cash of ₹208.2m as well as receivables valued at ₹995.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹44.6m.

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 ₹11.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Ador Welding boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Ador Welding has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ador Welding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the most recent three years, Ador Welding recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Ador Welding has ₹2.10m in net cash. And we liked the look of last year's 28% year-on-year EBIT growth. So is Ador Welding's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Ador Welding that you should be aware of before investing here.

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.