These 4 Measures Indicate That Anup Engineering (NSE:ANUP) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that The Anup Engineering Limited (NSE:ANUP) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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. 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 Anup Engineering

What Is Anup Engineering's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Anup Engineering had ₹448.3m of debt, an increase on none, over one year. However, its balance sheet shows it holds ₹1.05b in cash, so it actually has ₹604.1m net cash.

How Strong Is Anup Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anup Engineering had liabilities of ₹1.78b due within 12 months and liabilities of ₹455.4m due beyond that. On the other hand, it had cash of ₹1.05b and ₹1.28b worth of receivables due within a year. So it can boast ₹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 ₹27.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Anup Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Anup Engineering grew its EBIT by 86% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. While Anup Engineering 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, Anup Engineering recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 it impressed us with its EBIT growth of 86% over the last year. So we don't think Anup Engineering's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Anup Engineering you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.