Is Astral (NSE:ASTRAL) A Risky Investment?

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

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Astral

What Is Astral's Net Debt?

As you can see below, Astral had ₹978.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹5.33b in cash, leading to a ₹4.35b net cash position.

How Healthy Is Astral's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Astral had liabilities of ₹11.5b due within 12 months and liabilities of ₹839.0m due beyond that. Offsetting this, it had ₹5.33b in cash and ₹3.64b in receivables that were due within 12 months. So it has liabilities totalling ₹3.38b more than its cash and near-term receivables, combined.

This state of affairs indicates that Astral's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹520.8b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Astral also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Astral grew its EBIT by 36% 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 ultimately the future profitability of the business will decide if Astral 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 company can only pay off debt with cold hard cash, not accounting profits. While Astral 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. In the last three years, Astral's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Astral's liabilities, but we can be reassured by the fact it has has net cash of ₹4.35b. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't think Astral's use of debt is risky. We'd be motivated to research the stock further if we found out that Astral insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.