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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies IndiaMART InterMESH Limited (NSE:INDIAMART) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for IndiaMART InterMESH

How Much Debt Does IndiaMART InterMESH Carry?

The image below, which you can click on for greater detail, shows that IndiaMART InterMESH had debt of ₹459.1m at the end of March 2023, a reduction from ₹562.0m over a year. However, it does have ₹23.3b in cash offsetting this, leading to net cash of ₹22.8b.

A Look At IndiaMART InterMESH's Liabilities

The latest balance sheet data shows that IndiaMART InterMESH had liabilities of ₹8.56b due within a year, and liabilities of ₹5.30b falling due after that. On the other hand, it had cash of ₹23.3b and ₹284.3m worth of receivables due within a year. So it actually has ₹9.72b 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!

On the other hand, IndiaMART InterMESH saw its EBIT drop by 5.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 we empathize with investors who find debt concerning, you should keep in mind that IndiaMART InterMESH has net cash of ₹22.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹4.6b, being 142% of its EBIT. So we don't think IndiaMART InterMESH's use of debt is risky. 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. We've identified 1 warning sign with IndiaMART InterMESH , and understanding them should be part of your investment process.

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.