Is Olectra Greentech (NSE:OLECTRA) Using Too Much Debt?

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.' 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. We can see that Olectra Greentech Limited (NSE:OLECTRA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Olectra Greentech

What Is Olectra Greentech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Olectra Greentech had ₹671.0m of debt, an increase on ₹80.9m, over one year. But it also has ₹1.99b in cash to offset that, meaning it has ₹1.32b net cash.

A Look At Olectra Greentech's Liabilities

The latest balance sheet data shows that Olectra Greentech had liabilities of ₹3.30b due within a year, and liabilities of ₹827.0m falling due after that. Offsetting this, it had ₹1.99b in cash and ₹4.49b in receivables that were due within 12 months. So it can boast ₹2.35b more liquid assets than total liabilities.

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

Notably, Olectra Greentech's EBIT launched higher than Elon Musk, gaining a whopping 357% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Olectra Greentech 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 Olectra Greentech 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 two years, Olectra Greentech recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Olectra Greentech has net cash of ₹1.32b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹535m, being 94% of its EBIT. So we don't think Olectra Greentech's use of debt is risky. Another factor that would give us confidence in Olectra Greentech would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.