Is Megatherm Induction (NSE:MEGATHERM) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Megatherm Induction Limited (NSE:MEGATHERM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Megatherm Induction

What Is Megatherm Induction's Debt?

As you can see below, Megatherm Induction had ₹335.8m of debt at September 2024, down from ₹361.6m a year prior. However, it does have ₹424.7m in cash offsetting this, leading to net cash of ₹88.9m.

How Strong Is Megatherm Induction's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Megatherm Induction had liabilities of ₹1.37b due within 12 months and liabilities of ₹106.9m due beyond that. Offsetting these obligations, it had cash of ₹424.7m as well as receivables valued at ₹564.5m due within 12 months. So its liabilities total ₹487.4m more than the combination of its cash and short-term receivables.

Given Megatherm Induction has a market capitalization of ₹6.21b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Megatherm Induction boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Megatherm Induction has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is Megatherm Induction's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Megatherm Induction 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. In the last three years, Megatherm Induction created free cash flow amounting to 17% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Megatherm Induction has ₹88.9m in net cash. And it impressed us with its EBIT growth of 21% over the last year. So we don't have any problem with Megatherm Induction's use of debt. 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. For example, we've discovered 2 warning signs for Megatherm Induction (1 can't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.