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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Olectra Greentech Limited (NSE:OLECTRA) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Olectra Greentech had ₹1.87b of debt, an increase on ₹1.31b, over one year. However, it does have ₹2.19b in cash offsetting this, leading to net cash of ₹320.1m.

How Healthy Is Olectra Greentech's Balance Sheet?

According to the last reported balance sheet, Olectra Greentech had liabilities of ₹9.89b due within 12 months, and liabilities of ₹788.7m due beyond 12 months. Offsetting these obligations, it had cash of ₹2.19b as well as receivables valued at ₹7.84b due within 12 months. So its liabilities total ₹650.4m more than the combination of its cash and short-term receivables.

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 ₹130.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Olectra Greentech also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Olectra Greentech has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. 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, while the tax-man may adore accounting profits, lenders only accept 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's free cash flow amounted to 25% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Olectra Greentech has ₹320.1m in net cash. And it impressed us with its EBIT growth of 29% over the last year. So we don't think Olectra Greentech's use of debt is risky. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.