Is Azad Engineering (NSE:AZAD) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Azad Engineering Limited (NSE:AZAD) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Azad Engineering

How Much Debt Does Azad Engineering Carry?

As you can see below, Azad Engineering had ₹371.6m of debt at March 2024, down from ₹3.01b a year prior. But it also has ₹589.2m in cash to offset that, meaning it has ₹217.6m net cash.

How Strong Is Azad Engineering's Balance Sheet?

We can see from the most recent balance sheet that Azad Engineering had liabilities of ₹982.2m falling due within a year, and liabilities of ₹537.9m due beyond that. On the other hand, it had cash of ₹589.2m and ₹1.70b worth of receivables due within a year. So it actually has ₹768.6m more liquid assets than total liabilities.

Having regard to Azad Engineering's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹95.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Azad Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Azad Engineering grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. 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 Azad 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. Azad 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. During the last three years, Azad Engineering burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Azad Engineering has ₹217.6m 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 Azad Engineering's use of debt. There's no doubt that we learn most about debt from the balance sheet. 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 Azad Engineering .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com