Is Ahluwalia Contracts (India) (NSE:AHLUCONT) Using Too Much Debt?

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. As with many other companies Ahluwalia Contracts (India) Limited (NSE:AHLUCONT) makes use of debt. But is this debt a concern to shareholders?

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 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, 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.

View our latest analysis for Ahluwalia Contracts (India)

What Is Ahluwalia Contracts (India)'s Net Debt?

As you can see below, at the end of March 2024, Ahluwalia Contracts (India) had ₹449.7m of debt, up from ₹26.9m a year ago. Click the image for more detail. However, it does have ₹7.80b in cash offsetting this, leading to net cash of ₹7.35b.

A Look At Ahluwalia Contracts (India)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Ahluwalia Contracts (India) had liabilities of ₹12.1b due within 12 months and liabilities of ₹3.81b due beyond that. On the other hand, it had cash of ₹7.80b and ₹7.46b worth of receivables due within a year. So its liabilities total ₹680.8m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Ahluwalia Contracts (India)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹86.5b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Ahluwalia Contracts (India) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Ahluwalia Contracts (India) grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ahluwalia Contracts (India)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ahluwalia Contracts (India) 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. In the last three years, Ahluwalia Contracts (India)'s free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Ahluwalia Contracts (India)'s liabilities, but we can be reassured by the fact it has has net cash of ₹7.35b. And we liked the look of last year's 21% year-on-year EBIT growth. So we don't think Ahluwalia Contracts (India)'s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Ahluwalia Contracts (India) .

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.

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