Amara Raja Batteries (NSE:AMARAJABAT) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Amara Raja Batteries Limited (NSE:AMARAJABAT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Amara Raja Batteries

What Is Amara Raja Batteries's Debt?

As you can see below, Amara Raja Batteries had ₹1.07b of debt at March 2023, down from ₹1.26b a year prior. However, its balance sheet shows it holds ₹2.67b in cash, so it actually has ₹1.60b net cash.

A Look At Amara Raja Batteries' Liabilities

Zooming in on the latest balance sheet data, we can see that Amara Raja Batteries had liabilities of ₹14.5b due within 12 months and liabilities of ₹3.73b due beyond that. On the other hand, it had cash of ₹2.67b and ₹13.0b worth of receivables due within a year. So its liabilities total ₹2.63b more than the combination of its cash and short-term receivables.

Given Amara Raja Batteries has a market capitalization of ₹112.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Amara Raja Batteries 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 Amara Raja Batteries 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 it is future earnings, more than anything, that will determine Amara Raja Batteries'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Amara Raja Batteries 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. Looking at the most recent three years, Amara Raja Batteries recorded free cash flow of 23% 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 look at a company's total liabilities, it is very reassuring that Amara Raja Batteries has ₹1.60b in net cash. And it impressed us with its EBIT growth of 57% over the last year. So is Amara Raja Batteries's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Amara Raja Batteries 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.