Is Balu Forge Industries (NSE:BALUFORGE) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Balu Forge Industries Limited (NSE:BALUFORGE) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Balu Forge Industries's Net Debt?

The image below, which you can click on for greater detail, shows that Balu Forge Industries had debt of ₹359.1m at the end of March 2025, a reduction from ₹487.8m over a year. However, its balance sheet shows it holds ₹962.1m in cash, so it actually has ₹603.0m net cash.

How Strong Is Balu Forge Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Balu Forge Industries had liabilities of ₹1.78b due within 12 months and liabilities of ₹211.1m due beyond that. Offsetting this, it had ₹962.1m in cash and ₹3.27b in receivables that were due within 12 months. So it can boast ₹2.25b more liquid assets than total liabilities.

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

Check out our latest analysis for Balu Forge Industries

Even more impressive was the fact that Balu Forge Industries grew its EBIT by 112% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Balu Forge Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Balu Forge Industries 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, Balu Forge Industries saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Balu Forge Industries has net cash of ₹603.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 112% over the last year. So we don't have any problem with Balu Forge Industries's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Balu Forge Industries that you should be aware of.

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.