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

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. As with many other companies The Anup Engineering Limited (NSE:ANUP) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Anup Engineering

What Is Anup Engineering's Debt?

You can click the graphic below for the historical numbers, but it shows that Anup Engineering had ₹178.9m of debt in September 2024, down from ₹448.3m, one year before. However, its balance sheet shows it holds ₹315.0m in cash, so it actually has ₹136.1m net cash.

How Strong Is Anup Engineering's Balance Sheet?

According to the last reported balance sheet, Anup Engineering had liabilities of ₹2.95b due within 12 months, and liabilities of ₹282.6m due beyond 12 months. Offsetting this, it had ₹315.0m in cash and ₹2.29b in receivables that were due within 12 months. So its liabilities total ₹625.7m more than the combination of its cash and short-term receivables.

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 ₹72.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Anup Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Anup Engineering grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Anup Engineering'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 company can only pay off debt with cold hard cash, not accounting profits. 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 13% 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

We could understand if investors are concerned about Anup Engineering's liabilities, but we can be reassured by the fact it has has net cash of ₹136.1m. And we liked the look of last year's 23% year-on-year EBIT growth. So we are not troubled with Anup Engineering's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Anup Engineering , and understanding them should be part of your investment process.

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.