Does Elgi Equipments (NSE:ELGIEQUIP) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Elgi Equipments Limited (NSE:ELGIEQUIP) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Elgi Equipments

How Much Debt Does Elgi Equipments Carry?

As you can see below, at the end of March 2024, Elgi Equipments had ₹6.38b of debt, up from ₹5.77b a year ago. Click the image for more detail. However, it does have ₹7.39b in cash offsetting this, leading to net cash of ₹1.01b.

How Healthy Is Elgi Equipments' Balance Sheet?

According to the last reported balance sheet, Elgi Equipments had liabilities of ₹11.0b due within 12 months, and liabilities of ₹1.06b due beyond 12 months. Offsetting this, it had ₹7.39b in cash and ₹6.28b in receivables that were due within 12 months. So it can boast ₹1.58b more liquid assets than total liabilities.

Having regard to Elgi Equipments' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹225.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Elgi Equipments boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Elgi Equipments grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Elgi Equipments'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Elgi Equipments 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. Looking at the most recent three years, Elgi Equipments recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Elgi Equipments has net cash of ₹1.01b, as well as more liquid assets than liabilities. And we liked the look of last year's 19% year-on-year EBIT growth. So we don't think Elgi Equipments's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Elgi Equipments, you may well want to click here to check an interactive graph of its earnings per share history.

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.