These 4 Measures Indicate That Olectra Greentech (NSE:OLECTRA) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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.

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 Olectra Greentech had ₹145.3m of debt in September 2021, down from ₹152.3m, one year before. But it also has ₹1.01b in cash to offset that, meaning it has ₹863.5m net cash.

How Strong Is Olectra Greentech's Balance Sheet?

The latest balance sheet data shows that Olectra Greentech had liabilities of ₹1.02b due within a year, and liabilities of ₹155.5m falling due after that. Offsetting these obligations, it had cash of ₹1.01b as well as receivables valued at ₹2.68b due within 12 months. So it can boast ₹2.52b more liquid assets than total liabilities.

This short term liquidity is a sign that Olectra Greentech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Olectra Greentech has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Olectra Greentech made a loss at the EBIT level, last year, it was also good to see that it generated ₹261m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Olectra Greentech will need earnings to service that debt. 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 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 year, Olectra Greentech actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Olectra Greentech has ₹863.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹325m, being 125% of its EBIT. So we don't think Olectra Greentech's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Olectra Greentech .

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.

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.

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