We Think Amara Raja Energy & Mobility (NSE:ARE&M) Can Stay On Top Of Its Debt

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.' 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 Amara Raja Energy & Mobility Limited (NSE:ARE&M) does use debt in its business. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is Amara Raja Energy & Mobility's Debt?

The image below, which you can click on for greater detail, shows that at March 2025 Amara Raja Energy & Mobility had debt of ₹2.61b, up from ₹1.57b in one year. But on the other hand it also has ₹4.91b in cash, leading to a ₹2.30b net cash position.

A Look At Amara Raja Energy & Mobility's Liabilities

Zooming in on the latest balance sheet data, we can see that Amara Raja Energy & Mobility had liabilities of ₹23.1b due within 12 months and liabilities of ₹4.66b due beyond that. Offsetting these obligations, it had cash of ₹4.91b as well as receivables valued at ₹13.0b due within 12 months. So its liabilities total ₹9.87b more than the combination of its cash and short-term receivables.

Since publicly traded Amara Raja Energy & Mobility shares are worth a total of ₹183.7b, it seems unlikely that this level of liabilities would be a major 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, Amara Raja Energy & Mobility boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Amara Raja Energy & Mobility

But the bad news is that Amara Raja Energy & Mobility has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Energy & Mobility'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Amara Raja Energy & Mobility 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, Amara Raja Energy & Mobility recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Amara Raja Energy & Mobility's liabilities, but we can be reassured by the fact it has has net cash of ₹2.30b. So we don't have any problem with Amara Raja Energy & Mobility's use of debt. 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. We've identified 1 warning sign with Amara Raja Energy & Mobility , and understanding them should be part of your investment process.

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.