Here's Why IndiaMART InterMESH (NSE:INDIAMART) Can Manage Its Debt Responsibly

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, IndiaMART InterMESH Limited (NSE:INDIAMART) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 IndiaMART InterMESH

How Much Debt Does IndiaMART InterMESH Carry?

You can click the graphic below for the historical numbers, but it shows that IndiaMART InterMESH had ₹524.0m of debt in September 2022, down from ₹596.0m, one year before. However, it does have ₹19.5b in cash offsetting this, leading to net cash of ₹19.0b.

How Healthy Is IndiaMART InterMESH's Balance Sheet?

According to the last reported balance sheet, IndiaMART InterMESH had liabilities of ₹6.98b due within 12 months, and liabilities of ₹4.69b due beyond 12 months. Offsetting this, it had ₹19.5b in cash and ₹321.0m in receivables that were due within 12 months. So it can boast ₹8.18b more liquid assets than total liabilities.

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

In fact IndiaMART InterMESH's saving grace is its low debt levels, because its EBIT has tanked 28% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if IndiaMART InterMESH can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While IndiaMART InterMESH 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. Happily for any shareholders, IndiaMART InterMESH actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case IndiaMART InterMESH has ₹19.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in ₹3.7b. So we are not troubled with IndiaMART InterMESH's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - IndiaMART InterMESH has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.