Does Krishna Defence and Allied Industries (NSE:KRISHNADEF) Have A Healthy Balance Sheet?

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.' 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. We can see that Krishna Defence and Allied Industries Limited (NSE:KRISHNADEF) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Krishna Defence and Allied Industries

What Is Krishna Defence and Allied Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Krishna Defence and Allied Industries had ₹131.7m of debt in September 2024, down from ₹143.5m, one year before. But it also has ₹300.1m in cash to offset that, meaning it has ₹168.4m net cash.

How Healthy Is Krishna Defence and Allied Industries' Balance Sheet?

The latest balance sheet data shows that Krishna Defence and Allied Industries had liabilities of ₹305.3m due within a year, and liabilities of ₹2.64m falling due after that. Offsetting this, it had ₹300.1m in cash and ₹203.8m in receivables that were due within 12 months. So it can boast ₹196.0m more liquid assets than total liabilities.

This surplus suggests that Krishna Defence and Allied Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Krishna Defence and Allied Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Krishna Defence and Allied Industries grew its EBIT by 170% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Krishna Defence and Allied Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Krishna Defence and Allied Industries 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. Over the last three years, Krishna Defence and Allied Industries saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Krishna Defence and Allied Industries has net cash of ₹168.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 170% year-on-year EBIT growth. So we are not troubled with Krishna Defence and Allied Industries's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Krishna Defence and Allied Industries (including 1 which doesn't sit too well with us) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.