These 4 Measures Indicate That Paramount Communications (NSE:PARACABLES) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Paramount Communications Limited (NSE:PARACABLES) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Paramount Communications

What Is Paramount Communications's Debt?

The image below, which you can click on for greater detail, shows that Paramount Communications had debt of ₹224.2m at the end of September 2024, a reduction from ₹1.51b over a year. However, it does have ₹240.9m in cash offsetting this, leading to net cash of ₹16.7m.

A Look At Paramount Communications' Liabilities

The latest balance sheet data shows that Paramount Communications had liabilities of ₹1.42b due within a year, and liabilities of ₹131.8m falling due after that. On the other hand, it had cash of ₹240.9m and ₹2.26b worth of receivables due within a year. So it actually has ₹950.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Paramount Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Paramount Communications 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 Paramount Communications has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Paramount Communications 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Paramount Communications 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. During the last three years, Paramount Communications burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Paramount Communications has net cash of ₹16.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 67% over the last year. So we are not troubled with Paramount Communications's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Paramount Communications, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.