Anup Engineering (NSE:ANUP) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies The Anup Engineering Limited (NSE:ANUP) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Anup Engineering

What Is Anup Engineering's Debt?

As you can see below, at the end of September 2023, Anup Engineering had ₹448.3m of debt, up from none a year ago. Click the image for more detail. But it also has ₹1.05b in cash to offset that, meaning it has ₹604.1m net cash.

How Healthy Is Anup Engineering's Balance Sheet?

According to the last reported balance sheet, Anup Engineering had liabilities of ₹1.78b due within 12 months, and liabilities of ₹455.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹1.05b as well as receivables valued at ₹1.28b due within 12 months. So it actually has ₹93.2m more liquid assets than total liabilities.

Having regard to Anup Engineering's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹30.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Anup Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Anup Engineering grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Anup Engineering 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Anup Engineering 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. Over the last three years, Anup Engineering reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anup Engineering has net cash of ₹604.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 62% year-on-year EBIT growth. So we don't think Anup Engineering's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Anup Engineering that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.