Elecon Engineering (NSE:ELECON) Could Easily Take On More Debt

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Elecon Engineering Company Limited (NSE:ELECON) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Elecon Engineering's Debt?

The image below, which you can click on for greater detail, shows that at March 2025 Elecon Engineering had debt of ₹1.81b, up from ₹704.6m in one year. However, its balance sheet shows it holds ₹7.25b in cash, so it actually has ₹5.43b net cash.

How Healthy Is Elecon Engineering's Balance Sheet?

According to the last reported balance sheet, Elecon Engineering had liabilities of ₹5.37b due within 12 months, and liabilities of ₹1.94b due beyond 12 months. On the other hand, it had cash of ₹7.25b and ₹6.34b worth of receivables due within a year. So it actually has ₹6.28b more liquid assets than total liabilities.

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

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Also positive, Elecon Engineering grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Elecon Engineering's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Elecon Engineering 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 most recent three years, Elecon Engineering recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Elecon Engineering has net cash of ₹5.43b, as well as more liquid assets than liabilities. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in ₹3.7b. So we don't think Elecon Engineering's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Elecon Engineering that you should be aware of before investing here.

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.