Is Refex Industries (NSE:REFEX) Using Too Much Debt?

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 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 can see that Refex Industries Limited (NSE:REFEX) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Refex Industries's Debt?

The image below, which you can click on for greater detail, shows that at March 2025 Refex Industries had debt of ₹1.72b, up from ₹1.17b in one year. But on the other hand it also has ₹3.81b in cash, leading to a ₹2.10b net cash position.

How Healthy Is Refex Industries' Balance Sheet?

The latest balance sheet data shows that Refex Industries had liabilities of ₹3.96b due within a year, and liabilities of ₹1.91b falling due after that. On the other hand, it had cash of ₹3.81b and ₹8.57b worth of receivables due within a year. So it can boast ₹6.51b more liquid assets than total liabilities.

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

See our latest analysis for Refex Industries

On top of that, Refex Industries grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Refex Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Refex Industries 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. Over the last three years, Refex Industries saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Refex Industries has ₹2.10b in net cash and a decent-looking balance sheet. And we liked the look of last year's 31% year-on-year EBIT growth. So we don't have any problem with Refex Industries's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Refex Industries is showing 1 warning sign in our investment analysis , you should know about...

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.