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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Olectra Greentech Limited (NSE:OLECTRA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Olectra Greentech

What Is Olectra Greentech's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Olectra Greentech had debt of ₹1.31b, up from ₹838.2m in one year. However, it does have ₹1.77b in cash offsetting this, leading to net cash of ₹459.4m.

How Healthy Is Olectra Greentech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Olectra Greentech had liabilities of ₹6.62b due within 12 months and liabilities of ₹518.9m due beyond that. Offsetting these obligations, it had cash of ₹1.77b as well as receivables valued at ₹5.56b due within 12 months. So it can boast ₹189.3m more liquid assets than total liabilities.

This state of affairs indicates that Olectra Greentech's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹147.0b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Olectra Greentech boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Olectra Greentech has boosted its EBIT by 63%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Olectra Greentech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Olectra Greentech 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, Olectra Greentech created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Olectra Greentech has ₹459.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 63% year-on-year EBIT growth. So is Olectra Greentech's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Olectra Greentech's earnings per share history for free.

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.