Here's Why IKIO Lighting (NSE:IKIO) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, IKIO Lighting Limited (NSE:IKIO) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for IKIO Lighting

What Is IKIO Lighting's Debt?

You can click the graphic below for the historical numbers, but it shows that IKIO Lighting had ₹473.1m of debt in September 2023, down from ₹1.18b, one year before. But on the other hand it also has ₹2.50b in cash, leading to a ₹2.03b net cash position.

A Look At IKIO Lighting's Liabilities

According to the last reported balance sheet, IKIO Lighting had liabilities of ₹884.2m due within 12 months, and liabilities of ₹280.7m due beyond 12 months. On the other hand, it had cash of ₹2.50b and ₹938.8m worth of receivables due within a year. So it actually has ₹2.27b more liquid assets than total liabilities.

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

On top of that, IKIO Lighting grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is IKIO Lighting's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While IKIO Lighting 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. In the last three years, IKIO Lighting created free cash flow amounting to 5.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case IKIO Lighting has ₹2.03b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 55% over the last year. So is IKIO Lighting's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of IKIO Lighting's earnings per share history for free.

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.