Lloyds Engineering Works (NSE:LLOYDSENPP) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Lloyds Engineering Works Limited (NSE:LLOYDSENPP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Lloyds Engineering Works Carry?

As you can see below, at the end of March 2025, Lloyds Engineering Works had ₹826.5m of debt, up from ₹753.0m a year ago. Click the image for more detail. But it also has ₹1.35b in cash to offset that, meaning it has ₹526.3m net cash.

A Look At Lloyds Engineering Works' Liabilities

We can see from the most recent balance sheet that Lloyds Engineering Works had liabilities of ₹2.83b falling due within a year, and liabilities of ₹424.5m due beyond that. On the other hand, it had cash of ₹1.35b and ₹3.64b worth of receivables due within a year. So it actually has ₹1.75b more liquid assets than total liabilities.

Having regard to Lloyds Engineering Works' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹89.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Lloyds Engineering Works boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Lloyds Engineering Works

And we also note warmly that Lloyds Engineering Works grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Lloyds Engineering Works's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Lloyds Engineering Works 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. Looking at the most recent three years, Lloyds Engineering Works recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lloyds Engineering Works has ₹526.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 18% year-on-year EBIT growth. So is Lloyds Engineering Works's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Lloyds Engineering Works has 2 warning signs 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.