We Think Ahluwalia Contracts (India) (NSE:AHLUCONT) Can Manage Its Debt With Ease

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.' 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. We can see that Ahluwalia Contracts (India) Limited (NSE:AHLUCONT) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Ahluwalia Contracts (India)

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

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Ahluwalia Contracts (India) had ₹882.0m of debt, an increase on ₹556.6m, over one year. But on the other hand it also has ₹5.22b in cash, leading to a ₹4.34b net cash position.

How Healthy Is Ahluwalia Contracts (India)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ahluwalia Contracts (India) had liabilities of ₹12.3b due within 12 months and liabilities of ₹2.37b due beyond that. Offsetting these obligations, it had cash of ₹5.22b as well as receivables valued at ₹6.53b due within 12 months. So it has liabilities totalling ₹2.94b more than its cash and near-term receivables, combined.

Given Ahluwalia Contracts (India) has a market capitalization of ₹76.0b, 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. Despite its noteworthy liabilities, Ahluwalia Contracts (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Ahluwalia Contracts (India) has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ahluwalia Contracts (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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ahluwalia Contracts (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, Ahluwalia Contracts (India) recorded free cash flow of 46% of its EBIT, which is weaker 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 ₹4.34b. And it impressed us with its EBIT growth of 57% over the last year. So we don't think Ahluwalia Contracts (India)'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 Ahluwalia Contracts (India)'s earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.