IndiaMART InterMESH (NSE:INDIAMART) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, IndiaMART InterMESH Limited (NSE:INDIAMART) 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for IndiaMART InterMESH

What Is IndiaMART InterMESH's Debt?

The image below, which you can click on for greater detail, shows that IndiaMART InterMESH had debt of ₹562.0m at the end of March 2022, a reduction from ₹635.0m over a year. But on the other hand it also has ₹23.8b in cash, leading to a ₹23.2b net cash position.

How Strong Is IndiaMART InterMESH's Balance Sheet?

According to the last reported balance sheet, IndiaMART InterMESH had liabilities of ₹6.58b due within 12 months, and liabilities of ₹4.17b due beyond 12 months. On the other hand, it had cash of ₹23.8b and ₹461.0m worth of receivables due within a year. So it can boast ₹13.5b more liquid assets than total liabilities.

This short term liquidity is a sign that IndiaMART InterMESH could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, IndiaMART InterMESH boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that IndiaMART InterMESH has seen its EBIT plunge 18% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. IndiaMART InterMESH 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. Over the last three years, IndiaMART InterMESH actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case IndiaMART InterMESH has ₹23.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹4.0b, being 129% of its EBIT. So we don't have any problem with IndiaMART InterMESH's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that IndiaMART InterMESH insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.