We Think Olectra Greentech (NSE:OLECTRA) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Olectra Greentech Limited (NSE:OLECTRA) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

How Much Debt Does Olectra Greentech Carry?

As you can see below, at the end of September 2023, Olectra Greentech had ₹1.31b of debt, up from ₹838.2m a year ago. Click the image for more detail. 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?

We can see from the most recent balance sheet that Olectra Greentech had liabilities of ₹6.62b falling due within a year, and liabilities of ₹518.9m due beyond that. Offsetting this, it had ₹1.77b in cash and ₹5.56b in receivables that were due within 12 months. So it can boast ₹189.3m 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 it's very unlikely that the ₹106.3b company is short on cash, but still worth keeping an eye on the 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.

In addition to that, we're happy to report that Olectra Greentech has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Olectra Greentech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Olectra Greentech's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying 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 ₹459.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 59% year-on-year EBIT growth. So we don't think Olectra Greentech's use of debt is risky. 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.

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.