Techno Electric & Engineering (NSE:TECHNOE) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Techno Electric & Engineering Company Limited (NSE:TECHNOE) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Techno Electric & Engineering

What Is Techno Electric & Engineering's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Techno Electric & Engineering had ₹401.8m of debt in September 2021, down from ₹459.0m, one year before. But it also has ₹8.39b in cash to offset that, meaning it has ₹7.99b net cash.

A Look At Techno Electric & Engineering's Liabilities

We can see from the most recent balance sheet that Techno Electric & Engineering had liabilities of ₹5.33b falling due within a year, and liabilities of ₹2.10b due beyond that. Offsetting these obligations, it had cash of ₹8.39b as well as receivables valued at ₹6.96b due within 12 months. So it can boast ₹7.92b more liquid assets than total liabilities.

This surplus suggests that Techno Electric & Engineering is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Techno Electric & Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Techno Electric & Engineering grew its EBIT by 53% 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 ultimately the future profitability of the business will decide if Techno Electric & Engineering can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Techno Electric & Engineering 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 most recent three years, Techno Electric & Engineering recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Techno Electric & Engineering has net cash of ₹7.99b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 53% over the last year. The bottom line is that we do not find Techno Electric & Engineering's debt levels at all concerning. 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. For example - Techno Electric & Engineering has 2 warning signs we think you should be aware of.

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.