These 4 Measures Indicate That Nila Infrastructures (NSE:NILAINFRA) Is Using Debt Extensively

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. Importantly, Nila Infrastructures Limited (NSE:NILAINFRA) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Nila Infrastructures

What Is Nila Infrastructures's Net Debt?

The image below, which you can click on for greater detail, shows that Nila Infrastructures had debt of ₹625.5m at the end of September 2023, a reduction from ₹955.2m over a year. However, because it has a cash reserve of ₹99.7m, its net debt is less, at about ₹525.8m.

How Strong Is Nila Infrastructures' Balance Sheet?

We can see from the most recent balance sheet that Nila Infrastructures had liabilities of ₹7.06b falling due within a year, and liabilities of ₹389.5m due beyond that. Offsetting this, it had ₹99.7m in cash and ₹361.4m in receivables that were due within 12 months. So its liabilities total ₹6.99b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹4.21b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Nila Infrastructures would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely Nila Infrastructures has a sky high EBITDA ratio of 7.8, implying high debt, but a strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! Pleasingly, Nila Infrastructures is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 124% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nila Infrastructures'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Nila Infrastructures actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

We feel some trepidation about Nila Infrastructures's difficulty level of total liabilities, but we've got positives to focus on, too. For example, its interest cover and conversion of EBIT to free cash flow give us some confidence in its ability to manage its debt. We think that Nila Infrastructures's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. For example, we've discovered 3 warning signs for Nila Infrastructures (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.