Is Harsha Engineers International (NSE:HARSHA) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Harsha Engineers International Limited (NSE:HARSHA) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Harsha Engineers International

What Is Harsha Engineers International's Net Debt?

As you can see below, Harsha Engineers International had ₹1.72b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has ₹3.18b in cash to offset that, meaning it has ₹1.45b net cash.

How Healthy Is Harsha Engineers International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Harsha Engineers International had liabilities of ₹3.65b due within 12 months and liabilities of ₹263.1m due beyond that. Offsetting this, it had ₹3.18b in cash and ₹3.58b in receivables that were due within 12 months. So it can boast ₹2.85b more liquid assets than total liabilities.

This surplus suggests that Harsha Engineers International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Harsha Engineers International boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Harsha Engineers International grew its EBIT by 4.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Harsha Engineers International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Harsha Engineers International 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, Harsha Engineers International recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Harsha Engineers International has net cash of ₹1.45b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 4.9% in the last twelve months. So we don't have any problem with Harsha Engineers International's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Harsha Engineers International, 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.