We Think Atal Realtech (NSE:ATALREAL) Can Stay On Top Of Its Debt

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.' 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 Atal Realtech Limited (NSE:ATALREAL) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Atal Realtech

What Is Atal Realtech's Net Debt?

As you can see below, at the end of September 2024, Atal Realtech had ₹192.1m of debt, up from ₹141.2m a year ago. Click the image for more detail. But on the other hand it also has ₹263.0m in cash, leading to a ₹70.9m net cash position.

How Strong Is Atal Realtech's Balance Sheet?

According to the last reported balance sheet, Atal Realtech had liabilities of ₹194.0m due within 12 months, and liabilities of ₹126.4m due beyond 12 months. On the other hand, it had cash of ₹263.0m and ₹87.0m worth of receivables due within a year. So it actually has ₹29.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Atal Realtech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Atal Realtech has more cash than debt is arguably a good indication that it can manage its debt safely.

It is well worth noting that Atal Realtech's EBIT shot up like bamboo after rain, gaining 63% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Atal Realtech will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Atal Realtech 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. Over the last three years, Atal Realtech reported free cash flow worth 17% 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 it is always sensible to investigate a company's debt, in this case Atal Realtech has ₹70.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 63% year-on-year EBIT growth. So we don't have any problem with Atal Realtech's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Atal Realtech .

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.