Is IndiaMART InterMESH (NSE:INDIAMART) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that IndiaMART InterMESH Limited (NSE:INDIAMART) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for IndiaMART InterMESH

How Much Debt Does IndiaMART InterMESH Carry?

As you can see below, IndiaMART InterMESH had ₹596.0m of debt at September 2021, down from ₹710.0m a year prior. But it also has ₹24.0b in cash to offset that, meaning it has ₹23.5b net cash.

How Healthy Is IndiaMART InterMESH's Balance Sheet?

We can see from the most recent balance sheet that IndiaMART InterMESH had liabilities of ₹5.50b falling due within a year, and liabilities of ₹3.75b due beyond that. On the other hand, it had cash of ₹24.0b and ₹632.0m worth of receivables due within a year. So it can boast ₹15.4b 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. Simply put, the fact that IndiaMART InterMESH has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that IndiaMART InterMESH grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine IndiaMART InterMESH's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. 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 ₹23.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹4.0b, being 131% of its EBIT. So is IndiaMART InterMESH's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with IndiaMART InterMESH , and understanding them should be part of your investment process.

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.