Effwa Infra & Research (NSE:EFFWA) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Effwa Infra & Research Limited (NSE:EFFWA) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Effwa Infra & Research

What Is Effwa Infra & Research's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Effwa Infra & Research had debt of ₹200.0m, up from ₹140.6m in one year. But on the other hand it also has ₹277.4m in cash, leading to a ₹77.4m net cash position.

How Healthy Is Effwa Infra & Research's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Effwa Infra & Research had liabilities of ₹252.9m due within 12 months and liabilities of ₹28.6m due beyond that. Offsetting these obligations, it had cash of ₹277.4m as well as receivables valued at ₹633.4m due within 12 months. So it actually has ₹629.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Effwa Infra & Research could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Effwa Infra & Research boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Effwa Infra & Research has boosted its EBIT by 70%, thus reducing the spectre of future debt repayments. 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 Effwa Infra & Research will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Effwa Infra & Research 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. During the last three years, Effwa Infra & Research 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 we empathize with investors who find debt concerning, you should keep in mind that Effwa Infra & Research has net cash of ₹77.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 70% year-on-year EBIT growth. So we are not troubled with Effwa Infra & Research's debt use. 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 example Effwa Infra & Research has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.