Shakti Pumps (India) (NSE:SHAKTIPUMP) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shakti Pumps (India) Limited (NSE:SHAKTIPUMP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shakti Pumps (India)

How Much Debt Does Shakti Pumps (India) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shakti Pumps (India) had ₹1.63b of debt, an increase on ₹1.37b, over one year. However, its balance sheet shows it holds ₹1.79b in cash, so it actually has ₹158.1m net cash.

A Look At Shakti Pumps (India)'s Liabilities

According to the last reported balance sheet, Shakti Pumps (India) had liabilities of ₹8.46b due within 12 months, and liabilities of ₹615.8m due beyond 12 months. On the other hand, it had cash of ₹1.79b and ₹10.1b worth of receivables due within a year. So it can boast ₹2.85b more liquid assets than total liabilities.

This short term liquidity is a sign that Shakti Pumps (India) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shakti Pumps (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Shakti Pumps (India) grew its EBIT by 533% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shakti Pumps (India) will need earnings to service that debt. 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. While Shakti Pumps (India) 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. Considering the last three years, Shakti Pumps (India) actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shakti Pumps (India) has ₹158.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 533% over the last year. So we don't have any problem with Shakti Pumps (India)'s use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shakti Pumps (India) is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.