Olectra Greentech (NSE:OLECTRA) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Olectra Greentech Limited (NSE:OLECTRA) makes use of 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. If things get really bad, the lenders can take control of the business. 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.

Check out 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 2023 Olectra Greentech had ₹1.34b of debt, an increase on ₹671.0m, over one year. However, its balance sheet shows it holds ₹1.67b in cash, so it actually has ₹335.2m net cash.

A Look At Olectra Greentech's Liabilities

Zooming in on the latest balance sheet data, we can see that Olectra Greentech had liabilities of ₹6.65b due within 12 months and liabilities of ₹509.9m due beyond that. Offsetting this, it had ₹1.67b in cash and ₹6.63b in receivables that were due within 12 months. So it can boast ₹1.14b more liquid assets than total liabilities.

Having regard to Olectra Greentech's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹79.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 105% on last year. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 16% 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 we empathize with investors who find debt concerning, you should keep in mind that Olectra Greentech has net cash of ₹335.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 105% year-on-year EBIT growth. So we don't have any problem with Olectra Greentech's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Olectra Greentech, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.